Learn about the pros and cons of refinancing a reverse mortgage, when you might consider doing it, and how the process works so you can decide if it’s the right option for you.
Can You Refinance a Reverse Mortgage?
A reverse mortgage is an option for people who are over the age of 62, and on a fixed income, who want to tap into their home equity. In most cases, the person already has paid off all or most of their home, but they are looking for some additional cash flow. Instead of making mortgage payments as you do with a regular home loan, a reverse mortgage provides the homeowner with payments, either as a lump sum, a line of credit, or on a monthly basis. People who get a reverse mortgage are allowed to refinance into a new reverse mortgage (or another loan program) if better options become available, or if their financial situation changes. Borrowers must wait at least 18 months from the date of their original reverse mortgage to refinance, however. If your goal is to get out of a bad reverse mortgage, you can also look into alternatives, such as refinancing into a traditional loan, paying back your reverse mortgage, or selling the home.
Pros and Cons of Refinancing a Reverse Mortgage
Pros Explained
Can lower your interest rate: If it’s been a number of years since you took out your reverse mortgage and you think you may be able to qualify for a more favorable interest rate, a refinance could help you owe less in the long run. That’s because over time, interest keeps getting added to your balance. This is especially true if you plan to remain in the home for a long time. Gives access to a larger amount of equity: If your home value has increased significantly, you may have more equity to tap into now than you did when you first opened your reverse mortgage. Refinancing could provide more cash flow, if needed. Can shift from a reverse mortgage to a traditional one: Perhaps your income or asset situation has changed and you no longer need the funding that a reverse mortgage provides. In that case, switching back to a regular loan (assuming you could afford to make monthly payments again) might be better for you. Ensure your spouse/partner has financial security and a place to live: If you are the sole person on your reverse mortgage but you live with someone, you could refinance to add them as a co-borrower. That way, you can rest assured that they can continue living in the home and receiving payments from the reverse mortgage in the event that you die or need to move to a nursing home.
Cons Explained
High closing costs: Every time you refinance, including for a reverse mortgage, thousands of dollars will be added onto your loan amount to cover closing costs. In addition, for reverse mortgage refinances, you’ll also have to pay an annual mortgage insurance premium (MIP) equal to 0.5% of the mortgage balance.Involved process that requires eligibility: Just as with any refinance, to accomplish a reverse mortgage refi, you’ll have to meet some qualifications. That is, you’ll have to have enough equity in the home, pass a financial assessment (so the lender knows you can meet your property tax and home insurance obligations), and get a home appraisal.Can add to your debt: Between the closing costs and additional money you may borrow, when you do a reverse mortgage refinance you’re likely adding to the amount of debt that your heirs will have to repay when you either leave the home or die.
Should You Refinance Your Reverse Mortgage?
Deciding to refinance your reverse mortgage requires a lot of research and number-crunching. Here are some scenarios in which a reverse mortgage refinance could benefit a homeowner:
If you can get a lower interest rate or get better terms
Refinancing can be a great move if interest rates are significantly lower than they were when you first obtained your reverse mortgage. If you can qualify for a lower rate, that can help reduce your loan costs over time. In addition, if you are currently in an adjustable-rate reverse mortgage, you might consider refinancing into a more predictable fixed-rate loan. Finally, there are three different types of reverse mortgages: the federally backed home equity conversion mortgage (HECM); single-purpose reverse mortgages (provided by state and local government agencies); and private reverse mortgage loans. You could move from one type to another that better suits your needs.
To move from a reverse mortgage to a different type of loan
Some homeowners may decide that a reverse mortgage is no longer necessary for them. In such cases, you could refinance back into a traditional home loan. However, that would mean that you would again be responsible for making monthly payments. A big reason people may decide to take this step is so their children will be able to inherit the home without having to worry about paying back the reverse mortgage. Going this route should involve having a conversation with any family members who would be impacted.
To add on a spouse/partner
If your original reverse mortgage did not include your spouse or partner, you could refinance in order to add them on. Otherwise, if you die or have to move into a care facility, your spouse could end up losing the home if they cannot pay off the reverse mortgage balance. On the other hand, there are some situations in which a reverse mortgage refinance may not be a good move. Some examples of these include:
If you would lose too much equity
Whenever you add more costs onto a home loan, you lose equity. In the case of a reverse mortgage refinance, it would mean decreasing the proceeds that surviving relatives may get after selling and paying off the reverse mortgage.
If you can’t get a better interest rate
In a rising interest-rate environment, you may not be able to find a rate that’s low enough to justify the additional costs associated with refinancing. If you took out your original reverse mortgage when rates were at historic lows, it will be more challenging to find a lucrative refinance option.
If your home value hasn’t increased
Some people refinance their reverse mortgage if their home equity has gone up and they want to be able to access more of it. If that doesn’t apply to your situation, and you’ve already received a good amount of reverse mortgage payments, you may not have sufficient equity to qualify for a refinance.
How To Refinance a Reverse Mortgage
If you decide to refinance a reverse mortgage, you will follow a similar process to the one you went through with your first reverse mortgage. This time, you’ll want to shop around to find rates and terms that would improve your current situation. You’ll also want to evaluate whether your property value has changed since your first reverse mortgage and if you have enough equity to qualify for a refinance. From there, think about what your end goal is. For example, if it’s to lower your borrowing costs, you’ll be mainly focused on lowering your interest rate. If your primary goal is to add on a co-borrower, then you might be less concerned about savings because the objective is more about providing security for your partner. Once you get a sense of where you stand and what your options are, you should do some calculations, work with a trusted advisor, and talk to your loved ones to determine your next steps. If you move forward, be prepared to share identification, tax returns, and other financial statements, including income and asset information.
The Bottom Line
Refinancing a reverse mortgage—as with any other major home-loan decision—should be done carefully, as it can have major implications for your financial future and that of your heirs. The main question to ask is whether in refinancing you would be putting yourself and your loved ones in a more favorable position. If you review all your numbers and unequivocally can say yes, then it could be a good move for you.
