Can You Refinance a Reverse Mortgage?

Refinancing a reverse mortgage makes more sense for some homeowners than for others.

REVERSE MORTGAGES CAN offer homeowners ages 62 and older access to home equity. As with a regular mortgage, a reverse mortgage can be refinanced, and doing so sometimes makes sense.

What Is a Reverse Mortgage?

A reverse mortgage is a loan that allows older borrowers to tap into their home equity. Unlike a standard mortgage, which requires the borrower to make payments to a lender, a reverse mortgage calls for a lender to make regular payments to the borrower.

Interest accrues on the loan, with repayment on the principal and interest deferred until you sell the home, move out or pass away. This can be a helpful way to supplement your retirement income, but it subtracts equity from your home.

Types of Reverse Mortgages

A few kinds of reverse mortgages are available:

Home Equity Conversion Mortgages, also known as HECMs, are insured by the Federal Housing Administration. HECM for Purchase mortgages are also available and can help you buy a new home.

Proprietary reverse mortgages are similar to HECMs, but they do not have government backing.

Single-purpose reverse mortgages are used for one specific purchase.

How a Reverse Mortgage Refinance Works

Regardless of your reason for wanting a reverse mortgage refinance, knowing what the process involves is helpful.

Refinancing a reverse mortgage is similar to refinancing a conventional mortgage, says Chris Downey, president of Harbor Mortgage Solutions, a Boston-area residential mortgage company.

Essentially, you’re replacing your reverse mortgage with a new and ideally better one. The new loan may carry a different interest rate or offer a different monthly payout, depending on the terms of refinancing.

Qualifying for a reverse mortgage refinance requires meeting some specific criteria.

“There would need to be a very clear, defined benefit for a lender to justify refinancing a customer’s reverse mortgage,” Downey says.

For homeowners, the 5-5 rule can help determine whether refinancing will be beneficial. This rule, established by the National Reverse Mortgage Lenders Association, says that when refinancing a reverse mortgage:

Additionally, homeowners must meet a seasoning requirement, which pertains to how long you have held your mortgage. You can refinance no earlier than 18 months from when you closed on your original reverse mortgage.

The borrower also has to be qualified for a new reverse mortgage loan. The good news is that the criteria used to qualify borrowers for a reverse mortgage may be the same when refinancing.

For HECMs, borrower requirements include:

The property itself also has to meet FHA requirements. Generally, that means the home must be one unit occupied by the owner, it must have no health or safety hazards, and the owner must carry flood insurance in a high-risk area.

Borrower earnings, assets, living expenses and credit scores are also used to paint a full financial picture for reverse mortgage lenders. And borrowers are also required to meet with a reverse mortgage loan counselor as part of the process.

Requirements may vary if you’re refinancing a proprietary reverse mortgage, or a non-HECM, through a private company. Still, lenders will need you to demonstrate financial stability and have enough equity to support the new reverse mortgage. Generally, most reverse mortgages are HECMs because proprietary reverse mortgages aren’t widely available.

Should You Refinance a Reverse Mortgage?

Reverse mortgage refinancing is an option that makes sense in certain situations.

“There are many reasons it may be beneficial to refinance your existing reverse mortgage,” says Vivian Dye, reverse mortgage consultant at New York-based GuardHill Financial Corp. “It may have been several years since you closed, and rates may have lowered, or it makes more sense to switch from an adjustable rate to a fixed rate. Perhaps your home has appreciated in value, and you have additional equity you’d like to tap into; refinancing can increase the amount of money you’re eligible to receive from the loan.”

Additionally, refinancing a reverse mortgage may be a good choice if you want to add your spouse to the loan because he or she wasn’t on the original loan. Doing so would allow your spouse to stay in the home and extend income benefits from the reverse mortgage to your spouse if you die first, or if you move out of the home to a nursing home, but your spouse doesn’t.

Of course, reverse mortgage refinancing has some drawbacks. Remember, the mortgage has to be paid back to the lender eventually, and interest accrues on the loan. And if you end up with a higher interest rate than your original loan, this would mean a higher loan balance to repay.

Interest. When deciding on a reverse mortgage refinance, consider the interest rate environment. Dye says that among homeowners with a conventional mortgage, refinancing typically only makes sense if rates have fallen by at least 2%.

“Most conventional refinances are done to save money on interest payments, and this rule of thumb captures the trade-off between saving on interest and paying for the new loan,” she says.

You could apply that same rule of thumb to refinancing a reverse mortgage. When interest rates rise, as they did throughout 2018, refinancing reverse mortgages or other home loans could wipe out gains in interest savings.

Spouse protection. Refinancing to add a spouse to the loan can provide a couple a measure of financial protection and comfort. If the spouse who took out the loan dies or moves out of the home, loan distributions stop. Additionally, widows or widowers might be required to pay loans in full immediately if they aren’t on the loan documents, which could require selling the home. Both spouses should be listed as borrowers on the reverse mortgage to ensure that a surviving spouse can continue to live in the home.

However, precise rules for HECM loans may allow a surviving spouse to stay in the home even after the borrowing spouse dies or moves out. Consider whether a surviving spouse would be covered under these rules before refinancing just to add him or her to the loan.

Equity access. Refinancing to draw out more of your home’s equity has benefits and drawbacks. The obvious benefit is having more cash coming into the household to cover retirement expenses. The drawback, however, is a larger balance to repay later. Reverse mortgages typically must be paid off when the last surviving borrower dies, or possibly sooner if the home is no longer the primary residence, if taxes or insurance are unpaid, or if repairs are needed.

If the reverse mortgage loan balance grows larger than the value of the home, and the home is sold to repay the loan, neither the borrower nor the borrower’s heirs will have to pay more than the home is worth. The insurance will pay for any shortfall, as long as the home sells for at least 95 percent of the appraised value.