Is a reverse mortgage refinance right for you?
There are many instances when borrowers consider a reverse mortgage refinance with a new reverse mortgage. Refinancing existing loans does make sense at times, and sometimes it does not.
Borrower(s) should only consider refinancing their loan when it makes sense for their individual 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
- Your home value has increased considerably.
- You originally obtained your loan when the lending limit was less than the 2022 Home Equity Conversion Mortgage (HECM) limit of $970,800 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.You find yourself in a position where you need additional funds at this time or believe you will in the near or foreseeable future.
Increase in 2022 lending limits or home values
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 will usually benefit from a refinance at the new higher limits, but not always.
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 2022’s current limit of $970,800 have a good chance to receive more cash benefits.
How refinancing can protect a non-borrowing spouse
Couples often removed a younger spouse from title prior to 2015 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 refinance the loan or be forced to move when the older spouse passes if they do not have the means to refinance.
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 using the “eligible non-borrowing spouse” designation.
As an eligible non-borrowing spouse, the younger spouse may remain on title and can also stay in the home for life under the terms of the existing loan without having to make a mortgage payment – even if the older spouse should predecease the younger spouse.
Borrowers looking to refinance with the sole motivation of a lower interest rate may be disappointed but for some borrowers with high exiting rates, mortgage insurance renewals and servicing fees, there may be a good opportunity at this time.
In addition to possibly receiving more cash, you may be able to get a lower rate, possibly a lower margin and maybe even eliminate a fee such as a servicing fee which lowers the interest that you accrue over time.
The loan must make sense. If the loan is not beneficial for you, instructs lenders not to complete the loan but there is more latitude regarding what constitutes “beneficial” when you are adding a previously ineligible spouse or drastically benefiting your circumstances.
Taking 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 are available once again. 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 $970,800).
Reverse mortgage refinance eligibility
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.
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 for proprietary or jumbo loans. However, some exceptions may be made.
The rule is explained below, and it protects borrowers from equity stripping, which are constant refinances that do not benefit the borrower but accrue fees. To meet the test, 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 or significantly benefits the borrowers.
Such a case would be adding a non-borrowing spouse protection to your loan.
Another example is when the new loan would drop the accrual rate by a large amount, saving the borrowers thousands in interest accrual within the next 5 years (and even more over a longer period). There is a 12-month minimum time between loans before you can apply refinance your current reverse mortgage with a new reverse mortgage.
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 if you do not meet one of the exceptions.
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. Then the borrower must receive at least this 5 times amount or more 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 unless the borrower is adding a spouse who was not previously eligible or is significantly lowering their accrual rate.
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 must follow per HUD guidelines which also accounts for servicing set-asides but for simplicity sake, this is a simplification of the policy).
Consider the new closing costs
The costs you must incurare all the same costs 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 a new reverse mortgage are much lower and in fact, 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 of 2017, they changed the calculation of the initial mortgage insurance premium 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.
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 take that number and multiply it 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 first 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 not seen one that meets this yet 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% Up Front 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 already refinanced the loan before, the amount owed for initial mortgage insurance would be based on what you paid on your last refinance, not the initial loan.
The same would be true for the Maximum Claim Amount or the value you are using. 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 would be able to credit whatever you paid in the prior refinance against the $3,000 figure above but if you paid nothing, the most you would be required to pay would be $3,000.
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 reverse mortgage lender can order any services on your loan (appraisal, title, etc.).
Some states have even more requirements such as CA which imposes a cooling off period of 7 days after the counseling during which time the lender still cannot begin working on the loan.
Keep in mind 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.
HECM Reverse Mortgage Refinance Rates
Fixed Rate Adjustable Rate Lending Limit
4.81% (5.81% APR) 3.52% (1.75 Margin) $970,800
4.93% (5.93% APR) 3.77% (2.00 Margin) $970,800
4.99% (5.99% APR) 4.02% (2.25 Margin) $970,800
5.06% (6.06% APR) 4.27% (2.50 Margin) $970,800
5.18% (6.18% APR) 4.52% (2.75 Margin) $970,800
Adjustable Rate Payment Options: Lump Sum, Line of Credit, Term, Tenure, Combination.
APR Illustration: 4.99% + .50% Monthly MIP = 5.49% in total interest charges. Assumes $250,000 loan amount and includes .50% Mortgage Insurance, standard 3rd party closing costs.
Jumbo Reverse Mortgage Refinance Rates
Fixed Rate Adjustable Rate Lending Limit
5.49% (5.625% APR) 6.645% (4.875 Margin) $4,000,000
5.75% (5.875% APR) 6.76% (4.99 Margin) $4,000,000
5.99% (6.00% APR) 6.89% (5.124 Margin) $4,000,000
6.50% (6.625% APR) 6.89% (5.250 Margin) $4,000,000
Jumbo APR Illustration: Assumes $1,000,000 loan amount, includes standard 3rd party closing costs.
Adjustable Rate Payment Options: Lump Sum, Line of Credit, Term.
Index: 3-Mo. Libor
Lifetime Cap: 3% Over Start Rate