When you need an additional stream of income for retirement, a reverse mortgage is one option you might consider. A reverse mortgage allows you to tap into home equity, without having to make any monthly loan payments. It’s possible that you may need or want to refinance a reverse mortgage at some point. The process is similar to refinancing any other type of mortgage loan, though there are a few special considerations to keep in mind.
A financial advisor could guide you in setting up additional streams of income for retirement.
Can You Refinance Reverse Mortgage Loans?
Reverse mortgages can be refinanced like any other mortgage loan. When you refinance a reverse mortgage, you take out a new loan to pay off the old one. The new loan may be a reverse mortgage or a different type of home loan, depending on your reasons for refinancing.
In order to refinance a reverse mortgage, you’ll need to be able to qualify for a new loan. Qualification requirements can depend on whether you’re seeking a new reverse mortgage or another type of loan. If you’re trying to refinance into a new reverse mortgage through the Home Equity Conversion Mortgage (HECM) program, you must:
- Be age 62 or older
- Use the home as a primary residence
- Not be delinquent on any federal debt
- Own your home outright or have paid down most of the mortgage
- Have financial resources to pay homeowner’s insurance, property taxes and other costs related to owning the home
- Attend consumer credit counseling
Your reverse mortgage must also have closed at least 18 months prior to seeking a refinance loan.
Reasons for Refinancing a Reverse Mortgage
Refinancing any loan can take time and there are certain costs to factor in, so it’s important to be sure that it’s worth it before getting started. There are a number of situations where refinancing a reverse mortgage could make sense financially.
For instance, you might consider refinancing a reverse mortgage if:
- Home values have increased. If your home is worth more now than it was when you took out your reverse mortgage originally, you may want to refinance in order to borrow against more of your equity.
- Rates are lower. A reverse mortgage requires no monthly payment as long as certain conditions are met but interest does accrue on the balance. If interest rates have dropped since you got your reverse mortgage, refinancing to a lower rate could help save money on interest.
- You want to switch from a variable to a fixed rate. Lenders can offer reverse mortgages with variable or fixed rates. You might refinance to a fixed-rate loan if you originally started with a variable rate loan if you’re worried about rates rising.
- It’s necessary to add a spouse. Under HECM rules, non-borrower spouses can be held responsible for paying off a reverse mortgage balance if the primary borrower passes away or has to relocate permanently to long-term care. Refinancing to add your spouse to your reverse mortgage can relieve them of having to pay off a large balance as long as they’re living in the home.
- HECM limits are higher. Home equity conversion mortgage limits determine in part how much you can withdraw from your home’s equity. If HECM limits have increased since taking out your reverse mortgage you might refinance in order to be able to withdraw more equity.
- You want a different mortgage type. In some cases, it’s preferable to refinance reverse mortgage balances into a conventional mortgage loan. For example, if your heirs don’t want to be forced into having to sell the home to clear the reverse mortgage when you pass away you might choose to refinance to a traditional home loan instead.
Should You Refinance a Reverse Mortgage?
Whether you should refinance your reverse mortgage or not can depend on your financial situation. Reverse mortgage refinancing has both pros and cons that affect your decision-making.
On the pro side, refinancing could allow you to withdraw more of your home equity. That could be important to you if you need to increase your retirement income. A reverse mortgage refinance can also result in a lower interest rate, which means future savings when the balance comes due. And if you simply want to get out of a reverse mortgage altogether, refinancing can help you do that.
Refinancing is also the only way to add a spouse to a reverse mortgage. If you’re married but your spouse was under 62 when you took out a home equity conversion mortgage, then refinancing to add them to the loan can ensure they aren’t left in the lurch if something happens to you.
In terms of the downsides, reverse mortgage refinancing does come at a cost since you’ll need to pay closing costs and fees just as you would with any other refinance loan. If you’re taking out more equity, that will increase the amount that will need to be repaid later, since interest continues to accrue on the new balance.
If closing costs are too high, you’re not able to get a lower interest rate or your home’s value has decreased since you took out the reverse mortgage, then refinancing may not yield much in the way of benefits. You can apply the five times benefit rule to see if it makes sense mathematically.
This rule of thumb says that any benefit you get from refinancing should be equivalent to at least five times the cost you’ll pay. So if your closing costs for a reverse mortgage refinance add up to $4,000, your benefit (i.e., your increased borrowing power) should be $20,000. Talking to a HUD-approved consumer credit counselor your financial advisor can help you decide if refinancing will yield enough benefits to you to justify the costs.
How to Refinance a Reverse Mortgage
Reverse mortgage refinancing starts with deciding whether you want to get a new reverse mortgage or if you want to move into a different type of mortgage loan. Once you decide which type of loan is best, you can review the qualifications to gauge how likely you are to qualify.
With reverse mortgage loans, you’ll need to meet the conditions outlined earlier for home equity conversion mortgages. Eligibility for traditional mortgage loans can vary based on the lender. Whether you’re interested in a new reverse mortgage or a regular mortgage, it’s important to shop around to compare rates, fees and terms.
Once you find a loan that fits your needs, the remaining steps are fairly straightforward. You’ll need to apply for the loan and provide all of the documentation the lender requires. The loan goes through underwriting and if approved, you’ll be given a closing date. At closing, you’ll sign off on the paperwork and pay closing costs. If you’re withdrawing more equity, you’ll need to tell the lender how you’d like to receive those funds.
Reverse mortgages can be an important part of your income strategy for retirement, though they aren’t right for everyone. If you pass away with a reverse mortgage in place, your heirs might have to decide whether to pay off the balance to keep the home or sell it to clear the debt. Weighing the pros and cons of reverse mortgage refinancing can help you to decide if it’s right for you.
- Consider talking to your financial advisor about whether you should refinance a reverse mortgage or take one out to fund your retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Taking out a life insurance policy could help you to avoid leaving your loved ones with reverse mortgage debt. You can purchase a policy and name your heirs as beneficiaries so they can use the money to pay off the reverse mortgage after you pass away. This is something you might consider if you’d like the home to remain in the family after you’re gone. You can get life insurance quotes online in minutes.
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