Could I Refinance My Current Reverse Mortgage, And If So, Should I?
A reverse mortgage can be refinanced if the borrower wishes to alter the terms of the loan or move to a different type of loan. To put it simply, the process entails swapping out the current mortgage for a new one, just as in a regular refinancing. In order to qualify for a refinancing on a reverse mortgage, just as with any other loan. Here we'll discuss when and when a reverse mortgage refinancing makes sense.
Reverse mortgage refinancing can be done for many different reasons
If you are 62 or older and a homeowner, you may be eligible for a reverse mortgage, a special sort of home loan that allows you to access the equity in your home to get cash. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), and it is also the only one that is federally insured. Homeowners must have 50 percent equity in their property to apply.
To supplement retirement income or help cover a large expense, many people turn to reverse mortgages, where the lender pays payments to the borrower. However, there are a number of circumstances that might affect a homeowner's choice to refinance a reverse mortgage. A few instances are shown below.
Payments to borrowers are affected by the kind of rate. An interest rate on a reverse mortgage might be either fixed or variable. Fixed-rate homeowners receive a lump amount, while adjustable-rate homeowners have the flexibility to choose between regular payments and a line of credit, or to combine the two.
There are pros and cons to both interest rate structures and distributions. The risk of financial loss is reduced with a fixed rate as opposed to an adjustable one. Budgeting is made easier with regular payments over one large lump sum. Borrowers whose financial situations have changed may attempt to refinance their reverse mortgage in order to lower their interest rate or switch to a different payment option.
Wanting to have your interest rate lowered
Reverse mortgage borrowers receive regular payments, but the amount they ultimately pay back might be affected by interest rates. Interest accrues monthly, adding to your loan balance and reducing the amount you have invested in your home. Refinancing to a lower rate reduces the amount of interest added to the loan by your lender and slows the rate at which the equity decreases if interest rates have dropped significantly since you took out the reverse mortgage.
Your region now has higher HECM loan limits
FHA-insured reverse mortgages are subject to lending guidelines established by the Federal Housing Administration. The location of the property has a major role in determining these restrictions, which change often. Depending on when a homeowner originally got a HECM, the program's requirements might be very different. They might potentially have access to more funds by refinancing their reverse mortgage.
Changing to a different type of reverse mortgage would be the best option for you
There are essentially three types of reverse mortgages available. Borrowers with changing needs might refinance their reverse mortgage into a different loan product.
The home's worth has gone up
Homeowners may be able to access more of their home's equity via refinancing their reverse mortgage if its value has increased significantly since the loan was initially taken out.
Ideally, both you and your spouse would be named on the loan
Only homeowners 62 and above are eligible for reverse mortgages, so if only one spouse meets this age requirement, that person will often take on the role of sole borrower. Since the balance of a reverse mortgage becomes due upon the death or relocation of the last surviving borrower, it is in the best interests of a married couple to add the younger borrower as soon as they become eligible. The only way to include a spouse is through a refinancing of the reverse mortgage.
Your progeny is dead set on maintaining the home
When the last surviving borrower passes away or stops making the home their primary residence, the reverse mortgage must be paid in full. Typically, the home is sold by the owners or their heirs to settle the debt. Inheritees who want to keep the home but can't afford the loan can refinance it as a traditional mortgage and utilize the proceeds to settle the debt.
You need more cash than what a reverse mortgage can provide
There are other options to tapping into your home's equity that may provide you with extra funds. For instance, in a cash-out refinancing, the borrower takes out a new loan in exchange of an old one and receives a lump sum of cash. If you have a reverse mortgage and are considering refinancing it into a cash-out refinancing, you should compare the two options. However, borrowers who want to refinance their reverse mortgage for more cash must be prepared to make monthly payments.
Currently, you have an adjustable-rate mortgage (ARM), but you'd like to switch to a standard mortgage
Borrowers may be able to maintain more of their home's worth or even avoid selling it by refinancing their reverse mortgage into a conventional loan.
To get a lower interest rate on a reverse mortgage, refinancing isn't your only choice
If you're not sure a reverse mortgage refinancing is the right move for you, consider these alternatives. Depending on your goals, one of these paths may be more fruitful than the others.
I suggest you revise the conditions of payment
Those who take out a reverse mortgage and then decide they wish to change their repayment terms need not refinance their loan. Borrowers with HECMs have the option to pay a fee to have their monthly payments adjusted.
Optional cash-out refinancing
Cash-out refinancing is an option for homeowners who want to access their home's equity in one lump sum and refinance their reverse mortgage. Cash-out refinancing requires monthly payments from borrowers, but allows them to maintain more of their equity than would be possible with a reverse mortgage refinance.
A home equity loan, also known as a home equity line of credit, is a loan that lets you use the value of your property as collateral to access cash
Borrowing against the value of one's home is possible through the usage of home equity loans and home equity lines of credit (HELOCs). Loan revenues are distributed to borrowers in a number of alternative structures. While homeowners receive one lump payment when they take out a home equity loan, HELOC borrowers have access to their funds on an as-needed basis during the draw period.
The borrower is responsible for making payments on a home equity loan or home equity line of credit (HELOC), unlike with a reverse mortgage; nevertheless, these loans often have fewer costs and can be a cheaper choice than refinancing a reverse mortgage.