How Your Client Can Refinance Their Reverse Mortgage

How Your Client Can Refinance Their Reverse Mortgage

Homeowners looking to get more from their home equity could try to refinance their reverse mortgage loan. Reverse mortgages allow homeowners to turn their home’s equity into cash without making monthly payments, other than homeowners’ insurance and taxes. They can use the money they receive for anything, from medical bills to improving their lifestyle. 

Continue reading to understand how the mortgage works, along with the steps needed to take to refinance a reverse mortgage. This information can help determine whether the option would benefit your client and meet their needs. 

How Does a Reverse Mortgage Work?

Reverse mortgages refer to loans that allow homeowners to gain financial freedom from ever-increasing living expenses. A reverse mortgage loan uses some of the equity they have in their home and converts it into payments to them. 

Essentially, reverse mortgages are loans that let your client borrow against their home’s equity. They retain the title to their home, but instead of making mortgage loan payments, they get an advance on part of their home’s equity. 

In most cases, they won’t have to pay that money back for as long as they reside in the home. The loan amount is due and must be repaid when either the last surviving borrower no longer lives in the home or passes away, or when the house is sold. 

Types of Reverse Mortgages

Proprietary Reverse Mortgage

This type of reverse mortgage includes a private loan, like the Smartfi® Choice, that may offer a larger loan amount. Typically designed for homes with a higher appraised value than the FHA lending limits. 

Single-Purpose Reverse Mortgage

The least expensive option, single-purpose reverse mortgages, refer to a type of reverse mortgage loan that some non-profit organizations and state and local government agencies offer. They are suitable for homeowners with low to moderate incomes. 

Unlike other types, the borrower can only use these loans for one purpose, which the lender will specify. For instance, the lender can specify that the homeowner can only use the loan to pay property taxes or home repairs and improvements. 

Home Equity Conversion Mortgage

HECM loans are federally–insured reverse mortgages that the Department of Housing and Urban Development backs. Though they can be more expensive and initial costs can be high, the borrower can use the loan amount they receive for any purpose. The FHA–insured HECM typically offers more options for structuring the loan proceeds, in the form of line-of-credit, tenure or term payments, or a combination.

Benefits of Reverse Mortgages

Regardless of the type of reverse mortgage your client opts for, they could experience various benefits, including: 

• No more required monthly mortgage payments* 
• Tax-free cash 
• Various cash disbursement options 

On top of that, with reverse mortgages being non-recourse loans, the borrower will never owe more than their home is worth on the loan. 

Can Your Client Refinance a Reverse Mortgage?

Yes, your client has the option of refinancing their reverse mortgage loan, changing the existing loan terms, or moving to a different type of mortgage altogether. 

The process follows the same steps as a standard refinance and requires reverse mortgage borrowers to meet certain eligibility requirements. 

We will tell you how your client can refinance their reverse mortgage later, but first, we felt it prudent to share all they need to know for a reverse mortgage refinance. 

What Your Client Needs To Know When Refinancing Their Reverse Mortgage

The first thing your client needs to know about a reverse mortgage refinance is that they have to meet certain qualifications. For starters, they have to be 62 years or older.** Additionally, they must own the home, and it must be their primary residence, meaning they have to reside there for at least six months and one day every year. 

The borrower also must continue to pay homeowners’ insurance and taxes and continue to maintain the property. Finally, while reverse mortgage lenders will conduct a financial assessment, they do not generally have to meet a specific income requirement. 

When your client is applying to refinance their existing reverse mortgage, they will need to meet again with an independent housing counseling agency. The housing counselor will explain the HECM refinance guidelines and the loan’s financial implications. They will also inform them of the different fees, payment options, and closing costs that will affect the loans’ total cost over time. 

The Amount of Money Your Client Can Get

How much money the borrower can borrow when refinancing a reverse mortgage will depend on various factors, including: 

• Their age 
• Their home’s appraised value 
• Their current interest rates 
• The financial assessment 

Following the general rule, the older the borrower is, the higher the equity they have in their home, and the less they owe, the more home equity loan proceeds they can get. Lenders will use the factors above to calculate the amount of money your client will receive. 

Their evaluation determines the borrower’s ability and willingness to meet the mortgage requirements and their obligations. Depending on the results, the lender might need to set aside funds from the reverse mortgage proceeds to pay for things like mortgage insurance and property taxes. 

What Your Client Can Use the Money For

Your client can use the loan proceeds they get when they refinance a reverse mortgage in several ways, including: 

• Paying off the existing mortgage 
• Increasing their monthly cash flow 
• Paying various bills, such as medical expenses and credit card balances 
• Paying mortgage insurance and property taxes 
• Funding home improvements and repairs 
• Traveling 
• Improving their lifestyle 

Additional Considerations

Besides eligibility and the amount of money the borrower can get, they need to consider a few other things when they refinance a reverse mortgage. These include: 

• There are fees: Reverse mortgage lenders can charge an origination fee and servicing fees over the mortgage’s duration. 
• Owe more over time: Lenders will add interest to the balance they owe each month, which can add up over time if the borrower elects not to make payments on the reverse mortgage. 
• The interest rate can change: Reverse mortgages tend to have varying rates tied to changes with the market and the financial index. Though home equity conversion mortgages offer a fixed rate option, the borrower will have to take the loan proceeds as a lump sum amount. 
• The borrower is responsible for the costs related to their home: Since the homeowner retains their title, they have the responsibility for paying insurance, property taxes, utilities, homeowners’ association fees, and other expenses. Should they fail to do so, the lender will require them to repay the loan. 

How To Refinance a Reverse Mortgage

When refinancing a reverse mortgage, your client essentially replaces their current reverse mortgage with a new reverse mortgage. However, the new loan might have a different interest rate or offer the borrower a revised monthly payout. 

The qualifications they must meet when refinancing their reverse mortgage are similar to those they had to satisfy when obtaining the original reverse mortgage. For example, lenders will analyze their living expenses, earnings, assets, and credit scores to paint their financial picture and determine their financial stability. 

Besides this, the borrower will also need to meet additional requirements dealing with how long they have held their reverse mortgage. For instance, the homeowner can only refinance a reverse mortgage after holding the original mortgage for longer than 12 months from closing. 

The borrower might also have to meet other requirements, depending on the type of reverse mortgage they want to refinance. Most reverse mortgage refinancing cases deal with HECMs because proprietary reverse mortgages typically cater to higher home values and non-FHA approved condos. 

Refinancing Your Client’s Reverse Mortgage to a New Reverse Mortgage Loan

Let’s review the steps your client will need to go through when refinancing a reverse mortgage to a new reverse mortgage loan. 

• Check eligibility: The first step is meeting certain borrower and property qualifications, depending on the type of reverse mortgage they plan to refinance. Their home will also need to meet Federal Housing Administration requirements. 
• Shop around for the ideal loan: Request loan terms and interest rates for various loan products to compare and review the options with your client and find the most suitable one for them. 
• Apply for the loan: After picking their preferred option, the next step is applying for the loan. This process involves them supplying their property and financial information to the prospective lender. 
• Underwrite the loan: If the lender approves your client’s application, the next step involves the underwriting process. In this step, the lender will request a home appraisal and might ask them to provide additional information to prove that they have the resources needed to meet their financial obligations. 
• Close on the loan: After the underwriting process is complete, the last step includes closing on the new loan. This step involves reviewing the terms stated in the final loan documents, paying closing costs and upfront fees, and having your client decide how they would like to receive their funds. 

The borrower has the option of choosing to receive the funds as a: 

• Lump-sum amount 
• Monthly payment – tenure or term payments 
• Line of credit 
• Combination of line of credit and monthly payments 

They will also have to review and sign the HECM Anti-Churning Disclosure to verify that they will receive financial benefits. Churning refers to an unethical practice where lenders repeatedly refinance homeowners to earn extra profit while offering the homeowner very little financial benefits. 

Refinancing a Reverse Mortgage to a Traditional Mortgage

Your client also has the option of refinancing their current reverse mortgage to a conventional loan, doing so through the following steps: 

• Check eligibility: They will need to meet the loan program’s property and borrower requirements, which vary depending on the type of mortgage for which they apply. 
• Shop for loans: Approach multiple lenders and compare the loan terms and regular refinance mortgage rates they are offering. 
• Apply for the loan: Have your client pick their preferred option and fill out an application, supplying the lender with their property and financial information. 
• Underwrite the loan: Once the lender approves the application, they will order a home appraisal and request additional income and asset information. They will also need to verify the borrower’s credit scores. 
• Close on the loan: The final step involves reviewing the loan documents and paying loan fees and closing costs to close on the loan. 

Should Your Client Refinance Their Reverse Mortgage?

Choosing whether to refinance an original reverse mortgage will depend on the situation. In some instances, such as when it will help the borrower meet their financial needs, they may find it makes sense; however, in other instances, they may realize refinancing their reverse mortgage is not the right option for them. 

Refinancing a reverse mortgage can be an ideal option if: 

• The value of the borrower’s home has increased 
• The borrower can get a lower interest rate or more loan proceeds 
• There is an increase in the borrower’s local HECM loan limits 
• The borrower would like to include their spouse in the loan 
• The borrower needs more money 
• The borrower wants to change how they receive your money 
• The borrower wants to switch to a conventional mortgage 
• The borrower wants to get a fixed interest rate 

Pros and Cons of Refinancing a Reverse Mortgage

Regardless of the reason driving your client’s interest in reverse mortgage refinancing, they should consider the benefits and disadvantages the option offers. 

Pros

Refinancing a reverse mortgage can: 

• Offer your client access to more equity 
• Change the interest rate and payment type 
• Get them a fixed rate 
• Reduce the pace at which your client’s home equity decreases 
• Help them preserve their home equity 

Cons

As beneficial as the option is, it also comes with certain disadvantages, including: 

• Additional fees may occur 
• Increases the difficulty of repaying the existing loan 
• Increased total debt amount 

Refinancing a Reverse Mortgage Loans vs. a Traditional Mortgage Loan

While in a reverse mortgage, the borrower gets a loan that the lender pays them. With traditional mortgage loans, the borrower gives the lender monthly payments, gradually buying their home over time. 

Opting between choosing to refinance a reverse mortgage to either a new reverse mortgage or a traditional mortgage will depend on the homeowner’s needs and situation. Considering the drawbacks of refinancing reverse mortgages to a new loan, opting for a traditional loan might benefit some homeowners. Clients should carefully consider their options and discuss them with their financial advisor and registered loan officer. 

Start offering reverse mortgages or run a scenario with Smartfi Home Loans. Contact us online or call (877) 816-6706 today.