If you have qualified for a reverse mortgage in the past, you should find the qualifying criteria similar for a refinance of your reverse mortgage.
- Be 62 or older.
- Use the home as your primary residence.
- Have sufficient equity in your home.
- Demonstrate the financial stability to meet the loan’s ongoing obligations, such as home maintenance costs, property taxes, homeowners insurance, and homeowners association fees, if applicable.
Reasons for Refinancing
Just because you can refinance, however, doesn’t mean you should. There should be a clear benefit to refinancing. That said, here are three reasons why refinancing could make sense — the first two have to do with putting more money in your pocket; the third, with your peace of mind.
1. Your home has appreciated. Aside from your age and the current interest rate, your home’s value is a crucial factor in determining your loan amount (principal limit). A reverse mortgage loan is a tool for converting home equity into tax-free cash, so if your equity has increased, you likely will be able to pull out more money by refinancing into a new reverse mortgage loan.
Something to keep in mind: For 2020, the home value limit on a government-insured reverse mortgage is $765,600. If your home’s value exceeded this limit (say, your home was appraised at $800,000, the maximum home value for your refinance would still be $765,600).
2. Interest rates have declined. If interest rates have fallen since you took out your original reverse mortgage, you could be a good candidate for a refinance. Lower rates can translate into a larger initial payout, and the lower the rate of interest accrual, the less interest you (or your heirs) must repay when the loan becomes due.
Run the numbers. Based on your furnishing some basic information (your age, home value, and equity), many reverse mortgage calculators including AAG’s calculator at https://www.aag.com/reverse-mortgage-calculator/, can give you a ballpark figure of what you can expect to receive on your refinance. If you prefer, contact your reverse mortgage professional directly to run the numbers for you.
The reason the estimate is so important is that you want to know the new refinanced amount will substantially improve your situation. According to guidelines established by the National Reverse Mortgage Lenders Association, the increase in the principal amount should be equal to or more than five times the loan’s closing costs. Furthermore, the new loan proceeds should be equal to or more than 5% of the amount being refinanced. In other words, once your closing costs have been paid and your original reverse mortgage has been paid back, what’s left should be 5% or more of the total you refinanced. These two reverse mortgage refinancing guidelines are known as the 5-5 rule.
3. Provide security for your spouse. Refinancing a reverse mortgage may also be a good decision if you want to add your spouse to the loan because they were left off the original loan. That can happen for myriad reasons. Maybe when you took out your original reverse mortgage, your spouse wasn’t 62. Perhaps you were unmarried at the time. The reasons are less important than the consequences of having only one spouse on the loan. If not listed on the reverse mortgage loan documents, the widow or widower might be required to pay the loan in full, which could require selling the home. If both are listed, the surviving spouse can continue living in the home. Similarly, if one spouse had to move to a nursing home (away from the home for 12 consecutive months or longer), the other could continue to live in the home and receive loan disbursements so long as they fulfilled the ongoing obligations of the reverse mortgage, which include home maintenance costs and the payment of property taxes and homeowners insurance.
A reverse mortgage refinance isn’t something you should rush into. In fact, many lenders impose a seasoning requirement, which only allows those who have had their original reverse mortgage for a certain period (typically 18 months) to refinance.
But if, during that period, you have seen a significant increase in your home’s value, a decrease in interest rates, or you simply want the assurance that your spouse can remain in your home if you pass away or have to move out of the home, a reverse mortgage refinance may be just what you’re looking for.
Can I refinance my reverse mortgage?
Yes, it is possible to refinance a reverse mortgage loan. Like a traditional mortgage refinance, you will replace your existing loan terms with new terms.
Does a reverse mortgage refinance cost money if I retain the same lender?
Yes. There will be closing costs involved. In fact, you need to weigh these costs against the savings you expect to gain from a lower-interest rate reverse mortgage refinance.
Can’t I just add my spouse to my reverse mortgage?
No. Adding your spouse requires a new reverse mortgage loan.