A reverse mortgage provides flexibility to older homeowners, allowing them to convert their home equity into cash.
The biggest advantage of a reverse mortgage is that making monthly payments is optional, as long as you keep your property taxes, insurance, and upkeep current. The loan can even pay you each month. The loan balance only comes due when the last borrower dies or leaves the home.
Taking out a reverse mortgage early — homeowners become eligible once they turn 62 — can help boost retirement savings, and maximize the benefits via a guaranteed-to-grow line of credit on any unused funds.
But what if you take out a reverse mortgage, only to see interest rates drop a few years down the road? Are you stuck with the higher rate?
Not necessarily. You can refinance a reverse mortgage, just as you can a traditional mortgage. A reverse mortgage refinance can be the right move if interest rates dropped, your home has appreciated significantly in value, or you want to add your spouse to the loan.
But there are pros and cons to refinancing a reverse mortgage. Learn what’s involved, including the related fees and steps required.
A reverse mortgage is a loan that allows you to convert home equity into liquid cash.
Unlike a “forward” mortgage, in which your equity increases as you make monthly payments on the loan, a reverse mortgage enables you to take money out of the home in the form of a lump sum, a line of credit, monthly cash advances, or a combination of monthly advances and a line of credit.
As for payments?
“Fortunately, you don’t have to make payments on your reverse mortgage,” said Khari Washington, a real estate and mortgage broker with 1st United Realty & Mortgage, Inc., in Riverside, California. “Instead, the money has to be repaid when you leave or sell the home.”
You can continue to make payments if you choose. But you’re not obligated to, as long as you pay your property taxes and homeowners insurance and you maintain the home. If you stop paying taxes or insurance, or you let the home fall into disrepair, the lender can foreclose on the home.
Three types of reverse mortgages
- Home equity conversion mortgage (HECM): This is the most common type of reverse mortgage. It’s backed by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD), and it’s offered through private lenders who are approved by the FHA.
- Proprietary reverse mortgage: These are offered through private lenders and are not government-insured.
- Single-purpose reverse mortgage: Typically offered through local municipalities, these may be used for a specific purpose, such as repairs on the home.
For the purposes of this article, “reverse mortgage” refers to HECM loans. How much you can get in a reverse mortgage depends on several factors, including your age, the amount of equity you have, and the appraised value of the home.
Reverse mortgages are only available to homeowners who are 62 and older. If you’re 62 but your spouse is 60, you could take out a reverse mortgage but they would not be able to be on the loan.
To ensure they could stay in the home if you pass away or move into assisted living, you have two options: you can name them as a non-borrowing spouse when you take out the loan, or you can refinance to add them to the mortgage when they turn 62.
In addition to the age requirement, homeowners must have significant equity in their homes — typically 50% or more, though lenders may be able to approve you with less, depending on the circumstances.
The home must be your primary residence to qualify for a reverse mortgage, meaning it is where you live most of the year.
Finally, the home must be a qualifying property type:
- Single-family home
- Multifamily home with up to four units
- Planned unit development
- Manufactured home
- Modular home
Just as with a traditional mortgage loan, a reverse mortgage can be refinanced if you choose: provided you qualify for the refinance.
“Borrowers can refinance their reverse mortgage into a new one to take advantage of better terms, lower rates, and more preferred conditions of a new loan,” said Joe DeMarkey, director of the Washington, D.C.-based National Reverse Mortgage Lenders Association.
However, you have to wait at least 18 months from the closing date of your original reverse mortgage to refinance, he cautioned.
“You also have to be able to pay off the entire balance owed on your existing reverse mortgage,” said Emil Fleysher, a real estate attorney in Deerfield Beach, Fla. That means you must qualify for a refinance loan large enough to cover the existing loan.
Just because you are eligible to refinance a reverse mortgage or stand to benefit doesn’t necessarily mean you should, said Andrew Latham, a personal finance counselor/financial analyst in Raleigh, N.C.
You need to meet three rules to qualify for a reverse mortgage refinance, as well.
“First, the increase in your principal amount has to be equal to or higher than five times the loan’s closing costs. Second, loan proceeds from the refinance must be equal to or higher than 5 percent of the reverse mortgage being refinanced. Third, you must have held the existing reverse mortgage for at least 18 months,” Latham explained.
The home must continue to be your primary residence as well. So if you own this home and a second home at the beach, you must continue living in the current property for most of the year to be able to refinance the reverse mortgage on it.
A reverse mortgage refinance may make sense if you can:
- Access more home equity because your home has appreciated in value
- Lower your interest rate by a significant amount
- Add a non-borrowing spouse to the new loan
“Those who are equity rich and cash poor should consider a reverse mortgage refinance. If you are a senior who doesn’t have the money you need to live a comfortable lifestyle, you can use the equity to increase your standard of living,” Washington said.
However, because of the reverse mortgage requirements — that you must continue paying your property taxes and homeowners insurance, and you must keep up with the maintenance and repairs — HECM lenders must complete a financial assessment before they can approve borrowers for reverse mortgages.
Your lender will verify that the new loan makes financial sense for you (since there are closing costs associated with the loan, you want to know that you’re getting a better deal by refinancing). They’ll also make sure that you can afford to continue paying your property taxes, homeowners insurance, and the costs of home repairs.
Taking out a reverse mortgage refinance if the numbers don’t work is not in your interest or your lender’s.
“That could lead to default and possibly foreclosure,” Fleysher said. “Reverse mortgages are great for a lot of seniors under certain circumstances, but they can often lead to problems. Reverse mortgage servicing companies often file to foreclose on the home if the owner does not pay the property tax or insurance punctually.”
Related reading: What You Should Know About Reverse Mortgage Interest Rates
The process of refinancing a reverse mortgage is similar to refinancing a traditional mortgage. Here are the possible steps involved:
Contact your existing reverse mortgage lender or another lender to get interest rate quotes.
“You want to determine how your reverse mortgage loan balance currently compares to the market value of your house. You can then compare the interest rate and accumulation terms of your existing reverse mortgage to what your rate and closing costs would be if you refinance,” Fleysher said. “If the benefits are evident, you can proceed as you would with any other refinance.”
Submit a new reverse mortgage application with your chosen lender.
“A financial assessment will be conducted to make sure you’ll be able to afford ongoing expenses like property taxes, insurance, and home maintenance,” DeMarkey said.
Meet with a HUD-approved reverse mortgage counselor.
HUD requires all HECM borrowers to receive counseling prior to taking out a reverse mortgage. Your counselor will make sure you understand the loan terms and obligations.
Have your home appraised to determine its value.
Your reverse mortgage lender will order the appraisal, and you will pay for it as part of your closing costs. “The appraisal and loan package will be sent to an underwriter for review and approval,” DeMarkey said.
Sign your closing documents.
Sign closing documents with a title officer or attorney (depending on state requirements) after your loan is approved.
Access your funds, which may be disbursed within three days after closing.
“Your loan funds will first be used to pay off any existing mortgage on your home, and a new lien will be placed on your home with the reverse mortgage. You can then use the remaining funds from your reverse mortgage any way you choose,” DeMarkey said. How and when you receive funds will depend on whether you elect to receive the loan proceeds as a lump sum, line of credit, or monthly cash advances.
The costs to refinance a reverse mortgage are similar to what you would pay for a new reverse mortgage or traditional mortgage.
You’ll owe closing costs that may include a lender origination fee, as well as third-party fees for the appraisal, credit check, surveys (if required), and recording fees.
HUD caps the amount a lender can charge in origination fees at $6,000. They may charge $2,500 or 2% of your home’s value up to $200,000 plus 1% of its value above that, whichever is greater. But the origination fee cannot be more than $6,000.
Your closing costs can be paid in one lump sum at closing or rolled into your loan balance if you choose.
As with any reverse mortgage loan, you’ll also pay mortgage insurance premiums (MIP) and servicing fees.
The FHA mortgage insurance premiums for a HECM include an upfront fee of 2% of the loan amount, and an annual fee of 0.5% of the loan balance.
Lenders can also charge monthly servicing fees of up to $30 for fixed-rate reverse mortgages and $35 for adjustable-rate mortgages (ARMs).
Yes, you can refinance an existing reverse mortgage. However, you cannot refinance until you’ve had your current reverse mortgage for at least 18 months, and there must be a clear financial benefit to refinancing the loan.
You can refinance a reverse mortgage 18 months after you opened your current reverse mortgage if your home’s appraised value has increased significantly, you could qualify for a better interest rate, or to add your spouse to the loan once they turn 62.
Yes, you can get out of a reverse mortgage by paying off your balance owed – typically done by either refinancing the property or selling it. Joe DeMarkey with the National Reverse Mortgage Lenders Association says borrowers can pay off a reverse mortgage at any time without penalty.
Refinancing a reverse mortgage can be a wise move for seniors who fit the criteria.
“A refinance can pay off your existing reverse mortgage and possibly provide you with a lump sum or monthly payment tapped from available additional equity – money that can come in handy as you age,” Fleysher said.
However, be sure to inspect your reverse mortgage loan documents to learn if there are any fees related to prepayment, “and check with your refinancing lender or agent regarding closing costs involved,” he recommended.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. Youngest borrower must be at least 62 years old. Your monthly reverse mortgage advances may affect your eligibility for some other programs. At the conclusion of the term of the reverse mortgage loan contract, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to you, and you may need to sell or transfer the property to repay the proceeds of the reverse mortgage with interest from your assets. We will charge an origination fee, a mortgage insurance premium, closing costs or servicing fees for the reverse mortgage, all or any of which we will add to the balance of the reverse mortgage loan. The balance of the reverse mortgage loan grows over time, and interest will be charged on the outstanding loan balance. You retain title to the property that is the subject of the reverse mortgage until you sell or transfer the property, and you are therefore responsible for paying property taxes, insurance, maintenance and related taxes. Failing to pay these amounts may cause the reverse mortgage loan to become due immediately and may subject the property to a tax lien or other encumbrance or to possible foreclosure. Interest on reverse mortgage is not deductible to your income tax return until you repay all or part of the reverse mortgage loan. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.