Refinancing a Reverse Mortgage: When Does It Make Sense?
Reverse mortgages can be a fantastic way for borrowers 62 years and older to supplement their retirement income by tapping some of the equity in their home. Reverse mortgages come in two major variants, HECMs, which are insured and tightly regulated by the Federal Housing Administration (FHA), and proprietary reverse mortgages, which are less regulated and do not require FHA mortgage insurance. Both HECMs and proprietary reverse mortgages can be refinanced, though it only makes sense to do so in certain, specific situations. In some cases, reverse mortgage refinancing can increase a borrower’s monthly disbursements, while in other situations it’s done to add a spouse to a reverse mortgage.
If Your Property Has Increased In Value, You May Be Able To Increase Your Reverse Mortgage Payments
If the housing market in your area has heated up, and your home is now worth significantly more than when you first obtained your reverse mortgage, you may be eligible to receive more reverse mortgage funds through a refinance. However, refinancing a reverse mortgage to tap into your new home equity will usually only make sense if interest rates have stayed the same or fallen. If they’ve increased, refinancing your reverse mortgage may be more trouble than it’s worth.
Refinancing Is Typically The Only Way To Add A Spouse To Your Loan
If your spouse was not yet 62 years old when you took our your reverse mortgage, or you were not married to them when you took out the loan, you will most likely need to refinance in order to add them to your mortgage. In general, you always want to have both you and your spouse listed on a reverse mortgage, because reverse mortgages are typically due when the last borrower dies or moves away. Therefore, if you’re the only borrower and you pass away or move into a nursing home, your spouse could be forced to sell your home to pay off the loan. While surviving spouses do have certain rights with HECMs issued after 2014, they have to get certified as an eligible surviving spouse before a borrower’s death. and every year after their spouse dies, which can be laborious.
Refinances Can Also Benefit Borrowers In An Environment Of Dropping Interest Rates
Like we mentioned earlier, it doesn’t make much sense to refinance a reverse mortgage if interest rates are rising. However, if rates are falling, refinancing could make a lot of sense, even if the amount of equity in your home hasn’t yet increased significantly. Since you’ll be paying less in interest, your reverse mortgage payments will naturally be larger.
If Your Heirs Want to Keep Your Home, They May Decide to Refinance Your Reverse Mortgage Into A Traditional Home Loan
While most of the reasons to refinance we’ve discussed mainly involve the reverse mortgage borrower, one major reason actually involves their heirs. If you have a reverse mortgage and you want your children to inherit your home, but neither of you has the cash to pay off the reverse mortgage (and you also don’t have a term life insurance policy sufficient to do so either), your heirs may be able to refinance your reverse mortgage into a regular mortgage. They will then pay this mortgage like any other, and will be able to keep the family home.
The Costs of Refinancing a Reverse Mortgage
Unfortunately, refinancing a reverse mortgage can be expensive— in some cases, just as expensive as taking out a reverse mortgage in the first place. You’ll usually need to pay origination fees, home appraisal fees, and possibly other fees as well. So, if you do decide to refinance, you should have a pretty good reason to do so.
When You Should Not Refinance Your Reverse Mortgage
While we’ve listed several situations above in which it could be a good idea to refinance your reverse mortgage, there are a lot of situations in which it isn’t the best idea. For instance, if you live alone and believe that you might soon need to move to an assisted living facility or nursing home due to health issues, refinancing your reverse mortgage will likely be a waste of money. Also, if interest rates have risen or the value of your home has decreased over time, it will typically also make no sense to refinance. Finally, if you’ve gotten a reverse mortgage in the last 18 months, the National Reverse Mortgage Lenders Association (NRMLA) prohibits lenders from providing you a reverse mortgage, so you’ll have to wait for at least that time period in order to refinance.