Refinancing a Reverse Mortgage

Refinancing a traditional ‘forward’ mortgage is a fairly common practice.  For seniors who have a reverse mortgage, it is possible to refinance a Home Equity Conversion Mortgage (abbreviated as HECM, the most common type of reverse mortgage) with another Home Equity Conversion Mortgage.  

Why would someone want to refinance a reverse mortgage?  There are actually several reasons, and some of them are more applicable since the HECM limit changed in 2022.  I’d love to help anyone with a reverse mortgage with the information on when this might be a good idea and when to it’s not.

If you are new to my blog, thanks for taking the time to read.  My name is Bob, and I’m enjoying retirement.  I started this blog when I began my research about a reverse mortgage.  There’s a lot to learn, and I wanted to share it with others in my situation.  For today’s post, I have a lot of information on refinancing a reverse mortgage with a new reverse mortgage.

Let’s begin with HUD guidance on refinancing a reverse mortgage.  The U.S. Department of Housing and Urban Development (HUD) is the part of the U.S. government that oversees the Federal Housing Administration (FHA) which administers the Home Equity Conversion Mortgage program.  That’s a lot of acronyms, I know, but with HECMs being the most common type of reverse mortgage, it’s helpful to start here.  

HUD guidance says that if a borrower can gain a certain financial benefit from refinancing a reverse mortgage with a new reverse mortgage, then it may be worth it.  This is commonly called the 5 Times Benefit Rule.  In plain language, if a borrower can gain 5 times the financial benefit from the new loan compared to the costs of the new loan, then this may make good financial sense. 

An example would be a borrower who has a reverse mortgage with a principal limit of $100,000.  If a new loan would offer a principal limit of $160,000, and the closing costs are $10,000, then this would offer a benefit of 6 times the original loan.  This would exceed the 5 Times Benefit Rule, and thus make it financially viable according to HUD.

Now that you know the HUD guidance on this, what conditions would be favorable to refinance a reverse mortgage with a new reverse mortgage?  Let’s review a few of them.

1. Interest rates

This is usually an obvious starting point for borrowers.  However, interest rates alone are not always sufficient to make this the best financial choice.  It’s important to ensure that the rate is definitely low enough to make it worth it.

2. The Updated Reverse Mortgage Lending Limit of $970,800

If you have a home with a value at or above the HUD lending limit of $970,800, refinancing may make sense.  For reference, in 2008 the HUD lending limit for HECMs was $417,000.  The limit has been adjust several times over the last decade to reach its current limit.  For those that have a home value at or above today’s limit, you may stand to get more money out of a reverse mortgage because of your home’s value.  

3. You Have a Younger Spouse Not Included on an Existing Reverse Mortgage

Since 2015, there are some important protections in place for a spouse who is younger than 62 years old.  It’s possible with today’s reverse mortgages to add a spouse younger than 62 years old as a non-borrowing spouse.  This provides key protections for that younger spouse that would not require them to move out or sell their home if the older spouse predeceases them.  So if you have a reverse mortgage and your younger spouse was removed from the title in order to close that loan from a few years ago, this may be very important non-financial benefit to refinancing your reverse mortgage with another reverse mortgage.

You’ll want to ensure you understand the closing costs.  Remember that a reverse mortgage is a loan at the end of the day, and closing costs are part of any loan.  Anyone thinking of refinancing a reverse mortgage with a new reverse mortgage also must attend the HUD required counseling session, even if you’ve already done this for a previous HECM.  

I hope this information has helped if you are thinking about a new reverse mortgage.  If you have any questions about a new reverse mortgage, I’d reach out to the team at Equity Access Group for help.