There are many instances when borrowers consider refinancing their reverse mortgage, but it really would not make sense for them.
HUD and investors have guidelines in place that prohibit lenders from refinancing reverse mortgages when the loans do not meet certain targets for borrowers, more specifically when the borrower closed their existing loan too recently.
Refinancing existing loans does make sense at times, and sometimes it does not.
Borrower(s) should only consider refinancing their loan if the borrower(s) when it makes sense for their circumstances.
Some homeowners will find that they meet some 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 would only mean that the borrowers would incur additional unnecessary costs.
When to consider a refinance of your Reverse Mortgage:
- Your home value has increased considerably.
- You originally obtained your loan when the lending limit was less than the 2020 HECM limit of $765,600 and your value is at or higher than the HUD limit, especially the limit that was in effect at the time you closed your loan.
- 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.
- To benefit substantially from a lower interest rate or margin – This is a tough one and we will go into it further, most rate refinances alone are not beneficial.
- Refinance into a larger proprietary or jumbo reverse mortgage plan.
Increase in Lending Limits or Home Value
If your home value increases considerably since you closed your original loan, there may be an opportunity to 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 who have homes that have values higher than the HUD limit at the time their loans were closed can benefit from a refinance.
Prior to 2008, the HUD limit varied by county and the highest limit was $362,790. In 2008, the limit became a national limit, set at $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 higher valued homes who closed their loans before today’s current limit of $765,600 have a good chance to receive more cash benefits.
Refinancing Can Protect Non-Borrowing Spouse
Couples often removed a younger spouse from title prior to 2014 to close a reverse mortgage when one of the two spouses were not yet 62 years of age.
The loans borrowers closed with younger borrowers prior to 2015 must be repaid when the older spouse passes or is no longer living in the property.
By refinancing these loans with today’s HUD guidelines, younger spouses would not have to move when the older spouse passes or otherwise must move from the home.
Even if that younger spouse is still under 62 years old, the couple can refinance the loan if they qualify under the current HUD program parameters as the spouse being an eligible non-borrowing spouse.
As an eligible non-borrowing spouse, the younger spouse may remain on title and can also stay in the home for life without having to make a mortgage payment – even if something were to happen to the older spouse.
Borrowers looking to refinance with the sole motivation of a lower interest rate may be disappointed.
You may be able to get a lower rate, possibly a lower margin and maybe even eliminate a fee such as a servicing fee.
But you must meet the refinance qualifications we will discuss later That has nothing to do with lower rates and fees.
If you do not meet the additional benefits tests HUD requires (cash or payments), HUD would not allow that refinance.
Taking Advantage of New Jumbo / Proprietary Programs
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.
Both the HUD program and the private programs require you to have a significant equity position in your home to do a refinance of a reverse mortgage.
You must pass a “5-times benefit rule” to qualify for a reverse mortgage, the rule exists for both HUD and for proprietary or jumbo loans.
It is explained below, and it protects borrowers from equity stripping, 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.
This would mean that if your Principal Limit is $300,000, you would have to receive at least $30,000 in new proceeds from the refinance loan in addition to the new proceeds being at least 5 times the costs of the loan.
Preferably 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 itself protects the borrowers. Such a case would be adding a non-borrowing spouse protection to your loan.
Five Times Benefit Rule
The five times benefit rule is in effect for both HUD and jumbo loans and is in addition to the 10% additional Principal Limit requirement that HUD imposes.
To determine if a borrower meets the 5 times rule, you must take all the costs incurred to close the new loan and multiply those by 5.
Then the borrower must receive at least 5 times or more this amount of money with the new loan.
If 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 borrower does not meet the requirements and the lender will not grant the loan.
A good 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 have to follow per HUD guidelines which also accounts for servicing set-asides but for simplicity sake, this is a simplification of the policy).
Consider the Costs of Refinancing
The costs you must incur are all the same costs as when you got your first reverse mortgage (title, escrow, appraisal, origination fee, etc.) except for one…the mortgage insurance.
The mortgage insurance from the loan being paid off is transferred to the new loan so only the difference from the old level to the new level is what the borrower must pay on a refinance.
The private programs have no mortgage insurance so there is no up-front cost and no monthly renewal costs for mortgage insurance with these programs.
For example, if the old mortgage insurance on a HUD HECM was based on a lending limit of $200,000 and the new limit was $225,000, then the mortgage insurance would be 2% of the difference between the two, or $500 instead of the $4511.11 it would normally cost.
The borrower already paid the other $4,011.11 on the first loan and HUD does not charge it a second time for the new refinance.
You must complete the counseling again, even if you have already gone through the course in the past.
You must complete your counseling before the lender can order any services on your loan (appraisal, title, etc.).
Keep in mind that if you’re going form a HUD HECM to a private program, you must complete the counseling for that specific program.
Since the programs are a little different, lender require that you attend a counseling course for that specific program to be sure you understand the new product.
Obtaining a Refinance Quote
If real estate values have increased positively in your area or you have experienced a life change with the original borrowers, it may make sense to investigate a refinance.
Give us a call and let us look at your circumstances but if it doesn’t make sense for you, we will tell you right up front.
There is no reason to incur costs unless you, the borrower, really are going to benefit by doing so.
Just as with deciding if the loan was right for you in the first place, a refinance is all about you and your needs.
Borrowers should never refinance due to the 30 pieces of mail they receive each month pushing the loan.
And getting more money because someone calls you and tells you they think you should, or can, is not the right reason either.
But if you feel that this is something you need to investigate based on your needs or plans, let us show you what you can expect so that you can make an informed decision as to whether this is right for you.