How to refinance a reverse mortgage

Homeowners with existing mortgages may consider refinancing. Depending on your needs, you may want to make a switch from a variable rate to a fixed-rate payment or simply recognize an increase in your home’s overall value or look to keep your property in the family. 

Whatever your needs may be, refinancing your reverse mortgage is simple. In this blog, we’ll dive into what you need to know about reverse mortgages, what refinancing is, how you do it, and the pros and cons of a refi reverse mortgage. 

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What is a reverse mortgage?

A reverse mortgage is a common type of home loan that allows homeowners to use earned home equity instead of making monthly payments on a mortgage. With these loans, lenders provide the homeowner with regular payments versus you making mortgage payments to the lender. The reverse mortgage will collect interest over time and your interest payments are postponed until you move, sell your home or pass away. 

Reverse mortgages come in different forms. These include: 

• Home Equity Conversion Mortgages (HECMs), 
• Single-purpose or proprietary reverse mortgages
  

Depending on the type of reverse mortgage, each comes with its own eligibility criteria that the homeowner must meet before being approved. These typically include age and the amount of equity you have built up in your home. 

While similar, reverse mortgages differ slightly from HELOCs. Read more in our blog here. 

When should I refinance my reverse mortgage?

As mentioned above, refinancing reverse mortgages come with specific eligibility requirements. To apply for one or refinance an existing one, you must be 62 years of age or older. 

If you meet that eligibility, you may consider refinancing your reverse mortgage when:

• Your home’s value increases substantially.
• You are seeking lower interest rates or margins.
• Your children or heirs want to keep the property.
• Your initial reverse mortgage was less than the Home Equity Conversion Mortgages (HECM) lending amount is equal to or is more than the U.S. Department of Housing and Urban Development (HUD) lending amount.
• You are looking to include a younger spouse to the reverse mortgage who was not 62 years old when you pulled out your existing loan.
• You’re looking into refinancing your existing loan into a larger reverse mortgage plan.
  

As you can see, there are many reasons to look to refinance their reverse mortgage loan. 

The balance of your reverse mortgage becomes due at the time of your death, and your surviving heirs are responsible for paying it back. This is true even if they do not choose to remain in the home. Unless they have the total amount of the loan on hand to repay the lender, they will have to sell the property.

If you’re looking to keep your home in the family, financing out of your reverse mortgage with an assumable product may be the best option for you. This means you may seek a loan that provides you with a contract that your family can inherit. A traditional, first-lien mortgage, for example, is assumable. Meaning that it can be passed on along with the home, ensuring your loved ones will have a home long after your passing. 

This places undue and unnecessary pressure on your loved ones, leaving them responsible for the amount you had taken out. In the worst case, there could be a situation where the market slumps and the home’s value is not enough to cover the balance of the loan and the accrued interest. 

Reverse mortgages have typically been the only option available for homeowners across the U.S. looking to steady their income following retirement, making large or investment purchases, or renovating their homes. But now, there are other options available, including a Fraction Mortgage.

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Pros to refinancing your reverse mortgage

Considering a refi reverse mortgage? Here are some advantages: 

• Infusion of cash: refinancing allows you to access your home’s equity vs. subsisting on a limited amount of retirement income and having to make monthly payments or paying off an existing regular mortgage on your home.
• Lower interest rates: Depending on the lender, you may have a considerably lower interest rate on your refi reverse mortgage vs. a traditional mortgage. 
• Access to tax-free funds: Any money you draw from refinancing isn’t taxable, seeing as they are not considered income but are viewed as loan proceeds.

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Cons to refinancing your reverse mortgage

Refinancing your reverse mortgage can come with some serious disadvantages, including:

• Age restrictions: You have tight age restrictions. 
• Your property may not qualify for a refi: If the property that you want the refi for isn’t your primary dwelling, it may not qualify.
• Refinancing comes with high costs: There are fees associated with refinancing, akin to those with a traditional mortgage.
• Repayment of the loan falls on you: You may be required to repay the loan if you do not maintain the property or fail to pay your insurance or property taxes; your loan may become due ahead of schedule.

How do refi reverse mortgages work?

To refinance your reverse mortgage, you will have to apply and meet specific criteria. Each lender and type of reverse mortgage may have different requirements. For example, a Federal Housing Administration (FHA)- approved HECM and other government-backed reverse mortgages require the borrower to meet the following steps:  

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1. Meet the initial requirements

In advance of refinancing a HECM or any other government-backed or FHA-approved reverse mortgage, homeowners must meet the initial eligibility criteria. This includes:

• Being 62 years of age or older 
• Own your property fully or have earned enough equity to cover the amount of the existing loan
• Use the property as their primary residence
• Participate in a counseling session with a HUD-approved counselor 

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2. Meet the mortgage insurance premium (MIP) requirements

Created post-2008, this is an integral HUD guideline that limits the base MIP of a HECM or any other government or FHA-regulated loan refinancing to 3% of the increase in your maximum claim amount. 

Meaning that if your new maximum claim amount is $350,000 and your first claim amount on the original HECM was $200K, then the 3% limit results in $4,500. Essentially, if you initially paid a MIP of $3,000, you would only have to pay $1,500 to refinance your reverse mortgage.

3. Maintain an anti-churning disclosure

Your refi lender must provide you with an anti-churning disclosure. 

This disclosure refers to the practice of mitigating deceptive lending practices. These deceptive lending practices include a lender encouraging a borrower to refinance reverse mortgages multiple times. Following federal laws, your lender must provide a document outlining any cost estimates for the total amount of refinancing and the increase in your principal limit. 

4. Waiving required HUD counselling

Homeowners that meet the eligibility requirements can choose to waive their participation in the counselling session. To do this, you must meet the following criteria: 

• Having initiated the original HECM reverse mortgage before a specific date 
• Receiving an anti-churning disclosure from your lender 
• Have your new principal limit go beyond the overall cost of the refinance
• Initiating your refi within five years of the closing on your initial HECM

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5. Choose the best method for accessing your home’s equity 

One solution for homeowners looking to tap into their home equity is a Fraction Mortgage. Like a reverse mortgage, the Fraction Mortgage has no monthly payments* - you can choose to pay when you want. But, unlike a reverse mortgage, your home remains entirely yours, and there are no age restrictions. The Fraction Mortgage allows you to draw out more than $500K, the process is simple with fair rates, and your heirs can inherit the agreement following your passing. 

Depending on your need, you could also choose to refinance your reverse mortgage into a conventional mortgage if you’re not bothered by monthly payments.

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Refi reverse mortgages: what’s the best option for you? 

Looking to access the equity locked in your home via refinancing your reverse mortgage? Go the route with flexibility and fairness. The Fraction Mortgage has optional monthly payments, a fair rate and allows you to maintain ownership of your home - keeping it in your family until you decide when it’s time to sell.

Contact us to learn more about how Fraction can help you. Not ready to talk to someone yet? Find out how much you qualify for with our handy estimation calculator.