Just like refinancing a conventional, or what we call a forward, mortgage, borrowers consider refinancing a reverse mortgage when they need more money. But just like a forward mortgage, one needs to make sure they are going to receive a benefit when they refinance. And just like a forward mortgage, when refinancing the closing costs are part of the transaction.
When I receive the calls from my borrowers who have received the letters or encouragement on their statements I start with these questions:
- How long ago did you take out your reverse mortgage?
- What was the value of your home at that time?
- What is the value of your home now?
- What is your current loan balance on your reverse mortgage?
- Are you receiving monthly payments?
- Do you have funds in a Line of Credit?
- Why would you want to refinancing?
These questions are pertinent in helping one decide if it makes sense to consider refinancing.
Keep in mind the factors used to determine the amount a senior can receive from their reverse mortgage include: the interest rate of the program chosen, the age of the borrower (the older one is the more funds one can receive), and the home value based on an FHA appraisal or the FHA Lending Limit.
The first three questions are important in determining if you will be able receive more money when refinancing. As one aged during the time home vales were increasing refinancing made more sense because borrowers were more likely to be able to receive additional funds.
As you know, during the housing crash home values decreased. Now while home values have started to increase, we often find that the borrowers will still not receive additional funds from refinancing their reverse mortgage. (However some states the values have increased faster and higher than others. In MN, while increasing, the values have not increased enough to warrant refinancing in many situations.)
If, however, the initial reverse mortgage was taken when there was a lower lending limit, i.e. $251,750 and the current home value is, say $400,000, then refinancing may be considered.
For many years the FHA Lending Limit was based on the county in which one lived. In 2008 the Lending Limit was changed to a national limit of $417,000. In 2009 and through the end of 2016, the national limit was $625,500. January 1st through December 31, 2017 the FHA Lending Limit for reverse mortgages has been increased to $636,150.
Is refinancing a good idea just because the Lending Limit has increased? Not necessarily, especially if one’s home value isn’t in the higher valued range.
The current loan balance is important because when refinancing the reverse mortgage, the current reverse mortgage needs to be repaid. If there aren’t enough proceeds to pay off the current mortgage and to receive additional money then refinancing doesn’t make sense.
The next two questions, whether they are receiving monthly payments or have funds in a line of credit, are important because most likely it doesn’t make sense to refinance a reverse mortgage if they still have funds available to them that will last them for a few more years.
With a forward mortgage sometimes refinancing is done to reduce the interest rate. With the reverse mortgage generally it doesn’t make sense to refinance for the interest rate. Remember one isn’t making payments with a reverse mortgage so the interest rate doesn’t impact their monthly cash flow, it only impacts the amount that will be repaid when the loan becomes due and payable.
It is important to note that the reverse mortgage is non-recourse which means there is no personal liability to the borrower or their heirs if the loan balance is higher than what the home can be sold for.
The funds available to borrowers are determined by the age of the youngest borrower, the Expected Interest Rate and the program chosen. If the Expected Interest Rate is higher, less funds will be available.
Until 2008 all reverse mortgages were adjustable rate mortgages. Don’t panic, this isn’t a bad thing with a reverse mortgage. With the adjustable rate reverse mortgage there is more flexibility by having the option of a line of credit, monthly payments, a lump sum or a combination of these.
The adjustable interest rate is made up of an index and a margin. The index is based on the LIBOR and the margin is determined by the lender. HUD set a floor at 5.06% which means the funds available will be the same if the interest is at 5.06 or below. Currently the interest rates are remaining low, below the floor so one generally will not receive more funds if they were to refinance.
In 2008 a fixed rate option was introduced. With the fixed rate one has to draw all funds as a lump sum; the line of credit and monthly payment options are not available. One is not going to gain a benefit of more funds available by refinancing for a lower interest rate. However we have had some who refinance from a fixed rate to an adjustable rate to receive the flexibility the adjustable rate option offers, especially if one chooses to make payments on their reverse mortgage.
When refinancing one will still have closing costs so you have to consider if refinancing will offset off set a lower interest rate and/or funds one is receiving.
The Streamline Refinance of the FHA Housing and Urban Development (HUD) Home Equity Conversion Mortgage or HECM reverse mortgage requires a calculation demonstrating borrowers receive at least 5% more or they must go through the counseling session to review their situation. Some lenders require the counseling for any borrower refinancing their reverse mortgage. This is a strong protection to help borrowers from falling for a lender’s marketing letters and thinking refinancing may be a good idea when it really isn’t. Unfortunately it can cost seniors to find out this information as counselors are allowed to charge, generally $125 for the counseling session.
The National Reverse Mortgage Lenders Association (NRMLA) ethics committee set a guideline that reverse mortgage borrowers who want to refinance must wait a minimum of 18 months along with the “closing cost test” and “loan proceeds test.”
The last question or why you are considering is important in the decision to refinance because there could be valid reasons to refinance that benefit you. Some include a title change, i.e. adding a younger spouse to title when they turn 62, taking on a new spouse are a couple reasons.
While options should always be considered, after reviewing the above questions and your answers, at this time refinancing generally doesn’t make sense for the majority of reverse mortgage borrowers. Hopefully seniors don’t get sucked in with marketing letters & statements by completing an application so that the lender can just take an application when refinancing doesn’t make sense for them.
For further details on the reverse mortgage contact us if you are in Minnesota. As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible. For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.
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