Can You Refinance a Reverse Mortgage?
By: Courtney Jorstad
November 30, 2023 • 6 minute read
Yes, just like you can refinance a traditional mortgage, you can also refinance a reverse mortgage. If you have a reverse mortgage, there may be several reasons why refinancing might make sense.
Whether or not refinancing your reverse mortgage loan is the right decision depends on your personal situation and needs.
Find out everything you need to know about refinancing a reverse mortgage and how it works so you can know if it’s the right option for you.
Reasons to Refinance a Reverse Mortgage
There are several reasons why you may want to refinance your home equity conversion mortgage (HECM), also known as a reverse mortgage.
Some of these reasons include the following:
- Your home’s value increased. If the property value of your home has gone up since you first took out your reverse mortgage, refinancing your reverse mortgage may give you access to more funds, creating a financial benefit.
- The FHA-lending limit increased. HECM reverse mortgages are insured by the Federal Housing Administration (FHA), and the FHA increases the lending limit each year. The current lending limit for 2024 is $1,149,825. This increase may also give you access to more funds.
- Switch to a jumbo loan. If your home is worth more than the FHA lending limit, you may want to pursue one of the proprietary reverse mortgages that lenders offer, which in some cases allow homeowners to borrow up to $4 million.
- Add a borrower to the loan. Unfortunately, you can’t just add a spouse to your loan. For that to happen, you will have to refinance the loan. This may happen if your spouse was not 62 years old when you took out the reverse mortgage, or you married since taking out the loan.
- Get a new interest rate. If the current interest rates are better than when you first took out your reverse mortgage, you may want to get a lower interest rate, or you may want to change from an adjustable rate to a fixed rate.
- You want to change how you receive your funds. Reverse mortgage borrowers may opt to receive their funds as monthly payments, a lump sum, a line of credit, or a combination of the three. If you chose a lump sum, but now realize a line of credit would work better for you or another method, this may be another reason to refinance.
- You are unhappy with your current lender. If you are happy with your reverse mortgage, but unhappy with the lender you’ve been working with, one solution to this problem is to refinance your current loan with another reverse mortgage lender. (If this is your reason for wanting to make the switch, you can find our top recommendations here.)
How to Qualify for Reverse Mortgage Refinancing
The qualifications for HECM loan refinancing are the same as qualifying for a new reverse mortgage including the following:
- At least one of the borrowers must be 62 years old or older.
- You must have significant equity built up.
- You need to be at least 12 months from your previous mortgage or refinance.
- The home must be your primary residence.
- You cannot be delinquent in any federal debt such as taxes or student loans.
- You need to be able to continue to pay the property taxes, the homeowners insurance, maintain the home, and pay any required fees such as homeowners association fees.
- The property needs to be in good condition and not have any hazards related to health or safety.
- The homeowners must complete a counseling session with a third-party counselor.
Downsides to Refinancing a Reverse Mortgage
The Cost
The main downside to refinancing a reverse mortgage is the cost. You will have to pay a new origination fee, which can cost up to $6,000, and other fees to refinance your loan. For this reason, you will want to be sure that the benefits of refinancing outweigh these costs.
A general rule of thumb is to make sure that the amount of money you expect to receive is at least five times more than what you expect to pay in fees. If the refinancing fees are going to be $6,000, you want to make sure that you are receiving at least $30,000.
Adding a Younger Borrower
If you are looking to add a younger borrower to your new loan, it’s important to note that this could end up reducing how much you are able to borrow. One of the key factors that determines the total loan balance you are able to receive is the age of the youngest borrower.
Eligible non-borrowing spouses are entitled to several protections after the borrower passes away as long as the home is their primary residence, they continue to pay the property taxes, insurance, and maintain the home. They will not have to pay monthly mortgage payments while they remain in the home, but they will not receive the loan proceeds.
Increased Debt
If you want to refinance the HECM loan so that you can increase the amount of money you are receiving, this will also increase the amount of debt you have. This might be necessary in order to supplement your retirement income or to assist you in your financial situation, but this is something you will want to take into account.
How Long Before You Can Refinance a Reverse Mortgage?
Reverse mortgage borrowers cannot refinance the loan until 12 months after the closing date of the original reverse mortgage. This is known as the seasoning requirement.
Can You Refinance a Reverse Mortgage to a Traditional Mortgage?
Yes, you can refinance your reverse mortgage to a traditional loan, but just like refinancing a reverse mortgage, you will have to pay closing costs and other fees. You will also need to be prepared to assume monthly mortgage payments again, since they are a requirement of a forward mortgage.
How a Reverse Mortgage Refinance Works
The reverse mortgage refinancing process will be very similar to when you took out your first reverse mortgage.
This is what you can expect (please note that the exact process may vary depending on the lender):
- Meet with a loan officer. You will want to have a consultation with a reverse mortgage loan officer to be sure that the refinancing will give you the solution you need and to address any questions you may have.
- Attend counseling. Just like when you first took out a reverse mortgage, you will need to attend a counseling session with a third-party counselor approved by the U.S Department of Housing and Urban Development (HUD).
- Submit an application. Once you complete your counseling session, you will be able to file your application.
- Processing and underwriting. The application will then be processed and approved. Part of the approval process will include obtaining an appraisal to verify the value and condition of the home.
If you are refinancing your current reverse mortgage with a new reverse mortgage, the new reverse mortgage will pay off the previous one.
Bottom Line
There are a lot of reasons why older homeowners may want to refinance a reverse mortgage, but it’s also important to consider the costs of refinancing to be sure that it makes sense financially.
If you are looking to refinance your reverse mortgage, you can find our list of recommended reverse mortgage lenders here who will be able to help you through this process.
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This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
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