Can Reverse Mortgages Be Refinanced?
The short answer is yes, a reverse mortgage can be refinanced. However, just because it can be refinanced, doesn't mean that it's the right decision for your clients. In this article, we'll talk about refinancing into a traditional mortgage, refinancing into another reverse mortgage, and why a borrower would, or wouldn't, want to refinance. When refinancing into another reverse mortgage, the client(s) must show a net tangible benefit such as adding a spouse, gaining access to additional funds, or moving from an an adjustable rate to a fixed rate reverse mortgage.
Refinancing to a Traditional Mortgage
When a client refinances a reverse mortgage, they are obtaining a new loan to pay off the old one, just like they might do when refinancing a traditional mortgage. Similarly, when refinancing a reverse into a traditional mortgage, the new loan would be used to pay off the existing loan. A reverse mortgage can be repaid or refinanced into a traditional mortgage with no prepayment penalty, at any time. Clients should consider their circumstances and weigh the pros and cons of refinancing, before deciding to refinance their reverse.
Refinancing to Another Reverse Mortgage
Clients may be interested in refinancing to another reverse mortgage when their home value, interest rates, or other needs have changed. When refinancing to another reverse mortgage, the client(s) must show that the refinance will result in a bona-fide benefit to the borrower(s). All reverse products have set standards to ensure that the refinance is a benefit to the borrower(s). This can include a required percentage increase of Principal Limit vs. closing costs, and the increased amount of available funds. Your clients should always speak with their attorney and/or financial advisor first, to determine if a reverse to reverse refinance is right for them.
Why Refinance a Reverse Mortgage?
There are several reasons why someone might consider refinancing a reverse mortgage, including:
- To obtain a lower interest rate: If interest rates have gone down since the borrower obtained their original reverse mortgage, refinancing may allow the borrower to get a lower interest rate.
- To change the type of loan: Homeowners may want to change the type of reverse mortgage they have, such as switching from a fixed-rate to an adjustable-rate mortgage or vice versa.
- To access additional funds: Refinancing a reverse mortgage may allow homeowners to access additional funds if their home's value, or the HECM lending limit, have increased since they obtained the original loan.
- To add a spouse to the loan: If the homeowner's spouse was not on the original reverse mortgage, they may want to add them to the loan when refinancing.
Why Not Refinance a Reverse Mortgage?
Although refinancing a reverse mortgage is possible and there are many reasons to refinance, it’s important to keep in mind that refinancing is not always a good idea. Your clients may not want to refinance if any of these apply to their situation:
- The closing costs outweigh the benefits: Like any refinance, there are closings costs associated with the loan. Depending on your client's circumstances, closing costs can make refinancing an nonviable option.
- The home value has depreciated: If the home value has diminished since obtaining the reverse mortgage, it's unlikely to be a good time to refinance.
- Adding a younger borrower: Since the youngest borrower's age is a factor in determining loan proceeds, a younger borrower may make the refinance less feasible.
- Additional debt: Refinancing a reverse mortgage can mean taking on additional debt. The loan will eventually come due, and receiving more proceeds can mean more funds that must be repaid when the loan is due.
To summarize, yes, a reverse mortgage can be refinanced and when your client’s situation permits, it can be a benefit to them. However, refinancing is not always a good idea, nor is it always possible. Clients should consider their financial situation, how much of their home equity has been used, and should weigh the pros and cons. They should always speak with their attorney and/or financial advisor first, to determine if a reverse to reverse refinance is right for them. Lastly, just because a refinance does or doesn't make sense now, doesn’t mean it will or won't in the future.
Please also note that if your client is considering a reverse mortgage refinance and it was not their idea, they should take precaution to ensure it is not a scam. A refinance should always be a benefit to the client, not simply a benefit to a lender, contractor, or relative.
Our Smartfi Contributors are made up of a collective group of mortgage industry professionals, who share their personal opinions of the mortgage industry, topics, and various products. These are the express opinions of the Smartfi Contributor, and the article is based on their opinion and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by Smartfi Home Loans, LLC.
Reverse mortgage proceeds may affect the eligibility and payments of Medicaid, SSI and similar program benefits. All clients should be advised to seek guidance on their financial situation with their financial planner/advisor. A reverse mortgage is not suitable for all clients in all situations.
All loans are subject to loan underwriting and must meet all product requirements. Programs can change at any time, please see product handbooks for full underwriting guidelines.