Is a reverse mortgage refinance right for you?

There are many instances when borrowers consider refinancing into a new reverse mortgage.  Borrowers should only consider refinancing their loan when it suits their circumstances.

Some homeowners will find that they may meet some or all of the conditions listed below but don’t need additional funds.  In those cases, a refinance is not warranted.  For them, even though they qualify for additional funds, it might only mean that the borrowers would incur additional unnecessary costs.

When to consider a refinance of your reverse mortgage?

1. Your home value has increased considerably.
2. You originally obtained your loan when the lending limit was less than the 2023 Home Equity Conversion Mortgage (HECM) limit of $1,089,300.  Your value is at or higher than the HUD limit, especially the limit that was in effect when you closed your loan.
3. You are adding a younger spouse now who was not age 62 at the time you did the loan, and they were also not an eligible non-borrowing spouse to protect them from having to sell the home upon your death, or they are covered as an eligible non-borrowing spouse. However, you have a large line of credit still unborrowed and must ensure the spouse can access additional funds.
4. To benefit substantially from a lower interest rate or margin.
5. Refinance into a larger proprietary or jumbo reverse mortgage plan.

Increase in 2023 lending limits or home values. 

If your home value has increased considerably since you closed your original loan, you can sometimes refinance to obtain more money.

Small increases will not typically bring a large enough net gain to borrowers to make a refinance worthwhile or viable, as we will discuss later in refinance qualifications.

Homeowners with homes with values higher than the HUD limit when their loans were closed are most likely to benefit from a refinance at the new higher limits, but not always.

Before 2008, the HUD limit varied by county; the highest limit was $362,790.  In 2008, the limit became one uniform national limit of  $417,000.  In 2009, the limit was raised to $625,500, where it stayed for several years before it began to increase in 2015 as housing prices rose.

HUD HECM borrowers with homes valued higher than the limits when they originally closed before 2023’s current limit of $1,089,300 have an excellent chance to receive more cash benefits.

How refinancing can protect a non-borrowing spouse

Couples often removed a younger spouse from the title before 2015 to close a reverse mortgage when one of the two spouses was not yet 62.  The loans borrowers closed with younger borrowers before 2015 no longer must be repaid when the older spouse passes, and the younger spouse can continue to live in the property as long as they were married when the loan closed.  They have continuously lived in the property since that time. 

However, since those spouses are not borrowers on the loan, they will not have access to those funds. In this event, a refinance may be needed to allow the younger spouse to access future reverse mortgage proceeds.  By refinancing these loans with today’s HUD guidelines, younger spouses would be a borrower on the loan. Therefore, they could access the unborrowed funds in the line of credit.

Even if that younger spouse is still under 62, the couple can refinance the loan if they qualify under the current HUD program parameters using the “eligible non-borrowing spouse” designation.  This would not give the still eligible non-borrowing spouse access to funds if the borrowing spouse were to pass with funds still unused on the line, but it might allow the borrowers to increase the amount of funds available should they be needed now.

As an eligible non-borrowing spouse, the younger spouse may remain on title and stay in the home for life under the existing loan’s terms without making a mortgage payment – even if the older spouse should predecease the younger spouse in either instance.

Borrowers looking to refinance with the sole motivation of a lower interest rate may be disappointed.  Still, for some borrowers with high exiting rates, mortgage insurance renewals, and servicing fees, there may be a good opportunity at this time.  This would be especially true if more funds were available in the line of credit growing faster.

In addition to receiving more cash, you may get a lower rate, a lower margin, and maybe even eliminate a fee such as a servicing fee, which lowers the interest you accrue over time.  You would need to review your current terms to make this determination, as not all loans required servicing fees, but many of the older loans did.

The loan must make sense.  Instruct lenders to complete the loan if the loan is beneficial.  However, there is more latitude regarding what constitutes “beneficial” when adding a previously ineligible spouse or drastically benefiting your circumstances.  Remember, more money is not the only factor that makes the loan beneficial for you (just as getting more money may not make it a better deal for you and your circumstances).

Refinance to take advantage of new types of reverse mortgages

The last point is that with the reintroduction of the jumbo or proprietary programs, which offer loans to higher loan amounts, borrowers with higher-valued homes have more options.  Many borrowers accepted a lower loan amount on higher-valued homes under the HUD program because it was the only program available for many years.

Those borrowers can now look at the jumbo products for higher property values to free up equity for other purposes and possibly refinance their lower HUD loans with the higher jumbo programs for higher-valued properties (homes valued over the HUD limit of $1,089,300).

Also See: 3 Types of Reverse Mortgages

Reverse mortgage refinance qualifications 

HUD and private programs require you to have a significant equity position in your home to refinance a reverse mortgage.  HUD generally requires borrowers to pass a “5-times benefit rule” to qualify to refinance a reverse mortgage with a new reverse mortgage.  This rule exists for both HUD and proprietary or jumbo loans.  However, some exceptions may be made.

The rule is explained below, and it protects borrowers from equity stripping, which comes from constant refinances that do not benefit the borrower but accrue fees.  You must receive at least 10% of the new principal limit in additional reverse mortgage proceeds for the HUD HECM to HECM refinance to meet the test.

This would mean that if your Principal Limit is $300,000, you would have to receive at least $30,000 in net proceeds from the refinance loan in addition to the net proceeds being at least 5 times the costs of the loan.

Your interest rate or margin should be improved, but in a rising interest rate market, this is not necessary.  Exceptions may be made when the loan protects or significantly benefits the borrowers.  Such a case adds a non-borrowing spouse to your loan, making them eligible to access funds in the line of credit when previously unavailable.

Another example is when the new loan would drop the accrual rate by a significant amount, saving the borrowers thousands in interest accrual within the next 5 years (and even more over a more extended period).  There is a 12-month minimum time between loans before you can apply to refinance your current reverse mortgage with a new reverse mortgage.

HUD 5 times benefit rule explained

To determine if a borrower meets HUD’s 5 times rule, you must take all the costs incurred to close the new loan and multiply those by 5.  The amount of money, or the benefit to the borrower by getting the new loan, should be at least this much.  In other words, the benefit to the borrower should be at least five times the cost of the loan.  

Suppose the new loan does not give the borrower at least 5 times the costs in additional cash (above and beyond any money still available to the borrower on the existing loan).  The lender will only make an exception to grant the loan if the borrower adds a spouse not previously eligible or significantly lowers their accrual rate.  This is how lenders ensure that refinance loans benefit borrowers and are not merely churned to generate fees for originators.  If the loan doesn’t truly benefit the borrowers, the loan will not be closed. 

An excellent way to illustrate this is that if all the costs for the new loan would total $10,000, then the borrower would have to net $50,000 more on the new loan (there is a formula that the lenders must follow per HUD guidelines which also accounts for servicing set-asides but for simplicity sake, this is a simplification of the policy).

Additional resource: HUD mortgagee letter regarding the 5x benefit rule.

Consider the new closing costs. 

The costs you must incur are all the same as when you got your first reverse mortgage (title, escrow, appraisal, origination fee, etc.) except for one big difference: the mortgage insurance calculations.  The mortgage insurance costs on the first refinance of your reverse mortgage are much lower.  Unless your home value increases significantly, you may not even be required to pay any new upfront mortgage insurance.

With HUD’s Final Rule in September 2017, they changed the initial mortgage insurance premium calculation for refinance transactions.  It is a little complicated now, but the result is that borrowers pay less when refinancing their reverse mortgages with a new reverse mortgage, and borrowers receive a credit based on the fee they paid on their last reverse mortgage.

Without going into the whole calculation, the lender will look at the value of your property when you took out your last loan and subtract it from your current value.  They will multiply that number by .03, and if the answer is less than what you already paid on your last transaction, you will not be required to pay anything more on your next loan refinance.

There is a possible caveat to this for properties that have increased in value by more than $548,250 since the last reverse mortgage, but we have yet to see one that meets this, so we will stick with the rule that applies to almost all borrowers.

MIP formula for HECM refinance transactions

For example, if you had a home worth $200,000 and did a reverse mortgage but want to refinance now and it is currently worth $300,000, the lender will multiply the difference of $100,000 by .03, which is $3,000.  If you paid 2% Upfront or Initial Mortgage Insurance on your last loan, you paid $4,000.

Since $4,000 is greater than $3,000, you will owe nothing on the new transaction as long as it is your first refinance.  If you have refinanced the loan before, the amount owed for initial mortgage insurance would be based on what you paid on your last reverse mortgage on the same property, not the initial loan.

The same would be valid for the Maximum Claim Amount or the value you use.  It would also be determined by the information at the time of the last loan, not the original loan.

The old refinance rules required most borrowers to pay something when they refinanced, so you could credit whatever you paid in the prior loan against the $3,000 figure above, but if you paid nothing, the most you would be required to pay would be $3,000.

Counseling requirements 

You must complete the counseling again, even if you have already completed the course.  You must complete your counseling before the reverse mortgage lender can order any services on your loan (appraisal, title, etc.). 

HUD does not require re-counseling if the borrowers have gone through their counseling within the past 5 years and still have their certificates, but most states now require counseling in all instances.  Check with your lender to determine if counseling is necessary in your state if you counseled less than 5 years ago.

Some states have even more requirements, such as CA, which imposes a cooling off period of 7 days after the counseling when the lender still cannot begin working on the loan.  Remember that if you are going from a HUD HECM to a proprietary program, you must complete the counseling for that specific program.

Since private programs are a little different, lenders require that you attend a counseling course for that specific program to be sure you understand the new product.