Older adults over the age of 62 who are homeowners sometimes need a substantial amount…
Homeowners looking to get more from their home equity could try to refinance their reverse mortgage loan. Reverse mortgages allow you to turn your home’s equity into cash without making monthly payments, other than homeowners’ insurance and taxes. You can use the money you receive for anything, from medical bills to improving your lifestyle.
Continue reading to understand how the mortgage works, along with the steps you need to take to refinance a reverse mortgage. This information can help determine whether the option would benefit you and meet your needs.
How Does a Reverse Mortgage Work?
Reverse mortgages refer to government-insured loans that allow you to gain financial freedom from ever-increasing living expenses. A reverse mortgage loan uses some of the equity you have in your home and converts it into payments to you.
Essentially, reverse mortgages are loans that let you borrow against your home’s equity. You retain the title to your home, but instead of making mortgage loan payments, you get an advance on part of your home’s equity.
In most cases, you won’t have to pay that money back for as long as you 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 home’s 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, you can only use these loans for one purpose, which the lender will specify. For instance, the lender can specify that you 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, you can use the loan amount you receive for any purpose. The FHA insured HECM typically offers more options for structuring your 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 you opt for, you 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, you will never owe on the loan more than what your home is worth.
Can You Refinance a Reverse Mortgage?
Yes, you have the option of refinancing your 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 to refinance your reverse mortgage later, but first, we felt it prudent to share all you need to know for a reverse mortgage refinance.
What You Need To Know When Refinancing Your Reverse Mortgage
The first thing you need to know about a reverse mortgage refinance is that you have to meet certain qualifications. For starters, you have to be 62 years or older. Additionally, you must own the home, and it must be your primary residence, meaning you have to reside there for six months and one day every year.
You 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, you do not generally have to meet a specific income requirement.
When applying to refinance your existing reverse mortgage, you will need to meet again with a independent housing counseling agency. The housing counselor will explain the HECM refinance guidelines and the loan’s financial implications.
They will also explain possible reverse mortgage refinance alternatives, helping you compare the options. They will also inform you of the different fees, payment options, and closing costs that will affect the loans’ total cost over time.
The Amount of Money You Can Get
How much money you can borrow when refinancing a reverse mortgage will depend on various factors, including:
- Your age
- Your home’s appraised value
- Your current interest rates
- The financial assessment
Following the general rule, the older you are, the higher the equity you have in your home, and the less you owe, the more home equity loan proceeds you can get. Lenders will use the factors above to calculate the amount of money you will receive.
Their evaluation determines your ability and willingness to meet the mortgage requirements and your 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 You Can Use the Money For
You can use the loan proceeds you get when you refinance a reverse mortgage in several ways, including:
- Paying off the existing mortgage
- Increasing your 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
- Improving your lifestyle
Besides eligibility and the amount of money you can get, you need to consider a few other things when you refinance a reverse mortgage. These include:
- There are fees: Reverse mortgage lenders can charge an origination fee and servicing fees over your mortgage’s duration.
- You owe more over time: Lenders will add interest to the balance you owe each month, meaning the amount grows as the interest adds up over time, if you elect not to make any 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, you will have to take the loan proceeds as a lump sum amount.
- You are responsible for the costs related to your home: Since you retain your title, you have the responsibility for paying insurance, property taxes, utilities, homeowners’ association fees, and other expenses. Should you fail to do so, the lender will require you to repay the loan.
How To Refinance a Reverse Mortgage
When you refinance a reverse mortgage, you essentially replace your current reverse mortgage with a new reverse mortgage. However, the new loan might have a different interest rate or offer you a revised monthly payout.
The qualifications you must meet when refinancing your reverse mortgage are similar to those you had to satisfy when obtaining the original reverse mortgage. For example, lenders will analyze your living expenses, earnings, assets, and credit scores to paint your financial picture and determine your financial stability.
Besides this, you will also need to meet additional requirements dealing with how long you have held your reverse mortgage. For instance, you can only refinance a reverse mortgage after holding the original mortgage for longer than 12 months from closing.
You might also have to meet other requirements, depending on the type of reverse mortgage you 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 Reverse Mortgage to a New Reverse Mortgage Loan
Let’s review the steps you 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 you plan to refinance. Your home will also need to meet Federal Housing Administration requirements.
- Shop around for the ideal loan: Request loan terms and interest rates from several lenders and compare your options to find the most suitable one.
- Apply for the loan: After picking your preferred option, the next step is applying for the loan. This process involves you supplying your property and financial information to the prospective lender.
- Underwrite the loan: If the lender approves your application, the next step involves the underwriting process. In this step, the lender will request a home appraisal and might ask you to provide additional information to prove that you have the resources needed to meet your 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 deciding how you would like to receive your funds.
You have 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
You will also have to review and sign the HECM Anti-Churning Disclosure to verify that you 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 Your Reverse Mortgage to a Traditional Mortgage
You also have the option of refinancing your current reverse mortgage to a conventional loan, doing so through the following steps:
- Check eligibility: You will need to meet the loan program’s property and borrower requirements, which vary depending on the type of mortgage for which you apply.
- Shop for loans: Approach multiple lenders and compare the loan terms and regular refinance mortgage rates they are offering.
- Apply for the loan: Pick your preferred option and fill out an application, supplying the lender with your 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 your 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 You Refinance Your Reverse Mortgage?
Choosing whether to refinance your original reverse mortgage will depend on your situation. In some instances, such as when it will help you meet your financial needs, you may find it makes sense; however, in other instances, you may realize refinancing your reverse mortgage is not the right option for you.
Refinancing your reverse mortgage can be an ideal option if:
- The value of your home has increased
- You can get a lower interest rate or more loan proceeds
- There is an increase in your local HECM loan limits
- You would like to include your spouse in the loan
- You need more money
- You want to change how you receive your money
- You want to switch to a conventional mortgage
- You want to get a fixed interest rate
Pros and Cons of Refinancing a Reverse Mortgage
Regardless of the reason driving your interest in reverse mortgage refinancing, you should consider the benefits and disadvantages the option offers.
Refinancing a reverse mortgage can:
- Offer you access to more equity
- Change the interest rate and payment type
- Get you a fixed rate
- Reduce the pace at which your home equity decreases
- Help you preserve your home equity
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, you get a loan that the lender pays you. With traditional mortgage loans, you give the lender monthly payments, gradually buying your home over time.
Opting between refinancing your reverse mortgage to either a new reverse mortgage or a traditional mortgage will depend on your needs and situation. Considering the drawbacks of refinancing reverse mortgages to a new loan, opting for a traditional loan might benefit some homeowners. If you’re unsure which loan option is best for you, speak with one of our Loan Officers for a no-cost, no-obligation consultation to determine the right mortgage to meet your needs.
The Thoughtful Approach To Lending
Your home can be both a cherished reminder of the past and a foundation for the future. While your mortgage can aid you in your dream of owning your home, it can also be a significant hindrance.
At Smartfi Home Loans, LLC, we understand how valuable a home can be and have dedicated our time, efforts, and expertise to provide you with a pleasant mortgage experience. We work to help find the right mortgage for you, offering competitive rates and tailored personal loan options.