There's a long road in between getting your mortgage and finally paying it off. After 15 or 20 years of paying off a mortgage, your situation and income may have changed. Retirement or other types of income loss can affect your ability to make monthly mortgage payments.
Luckily, buyers have many options for modifying their mortgage or taking out additional loans. If you are reaching the age of retirement, you have a unique opportunity. Seniors can get a reverse mortgage; and later, they can refinance their reverse mortgage in order to supplement income or pay living expenses without any stress.
Let’s review the basics of reverse mortgages, refinancing, and why you might want to refinance a reverse mortgage.
What is a reverse mortgage?
Before you learn about refinancing a reverse mortgage, you might want to know what a reverse mortgage is in the first place.
A reverse mortgage (also known as a “home equity conversion mortgage,”) is a type of home equity loan. Home equity loans are commonly used as a second mortgage, but reverse mortgages are unique. In order to get a reverse mortgage, you must be over 62 years of age and have a small amount of money left to pay on your mortgage. Often, homeowners get reverse mortgages when they have no plans to buy new property and want a simple solution for keeping up with living expenses.
They may also choose a reverse mortgage if they don’t want to make monthly payments.
What can you get from a reverse mortgage?
Lenders determine limits based on the value of the home. In the first year of a reverse mortgage, borrowers can take out up to 60% of the initial principal limit. Borrowers who need extra money to pay off their existing mortgage can also take out extra money, but they will never owe more than the value of the home.
Borrowers receive money from their reverse mortgage through a lump sum or through a line of credit depending on the borrower’s needs. This money can be used to pay off a current mortgage, pay off everyday living expenses, or supplement income.
Terms of the reverse mortgage will vary, but most have adjustable interest rates.
How to Qualify for a Reverse Mortgage
Age is just one factor in whether a buyer can qualify for a HECM loan. Lenders only give reverse mortgages to borrowers who meet the following qualifications:
- The borrower is currently residing in the home (borrowers cannot take out reverse mortgages on investment properties or vacation homes)
- The home meets FHA property standards and flood requirements
- The borrower is “creditworthy” with income that can pay off mandatory expenses
- The buyer has enough funds to pay off property taxes, HOA fees, and other related expenses
- The borrower is currently not delinquent on federal debts
- The buyer has recently attended a HUD course
What does “refinancing” mean?
Reverse mortgages are a way for homeowners to pay off a current mortgage or make the burden of living expenses easier to handle. But reverse mortgage loans are far from the only option to help with the burden of monthly mortgage payments.
Borrowers might find themselves struggling to pay back their mortgage due to high-interest rates, loss of income, or other factors. One way to make this process easier is to refinance the existing mortgage.
When borrowers “refinance” their mortgage, they replace the existing mortgage with a new one. The mortgage refinance should result in more favorable loan terms; for example, borrowers might refinance their mortgage in order to switch from an adjustable-rate mortgage to a fixed-rate mortgage.
Refinancing may or may not be the best option for paying off your mortgage. Before you refinance a loan, consider the costs of refinancing:
- The new loan may restart the amortization process, extending the amount of time you must pay off the mortgage
- Refinancing your mortgage will come with additional costs, including closing costs and origination fees
- Lenders will look at the change in your credit score and outstanding loan balance before drawing up the terms of your new loan
How is refinancing a mortgage different than a reverse mortgage?
We are throwing around a lot of “r” words right now. Let’s briefly go over the differences between a mortgage refinance and getting a reverse mortgage.
- A mortgage refinance changes the original terms of your current mortgage. A reverse mortgage does not. If you face high-interest rates, it may be more cost-effective to refinance rather than get a reverse mortgage.
- Refinancing requires monthly payments. These payments will probably be smaller than your original mortgage payments. Borrowers with a reverse mortgage will not have to make monthly payments.
- Reverse mortgages do not require buyers to owe money past the home’s value.
- Reverse mortgages often come with high costs, including a mortgage insurance premium. Borrowers may refinance their mortgage in order to eliminate mortgage insurance costs.
Some seniors may take out a reverse mortgage as an alternative to refinancing. Reverse mortgage payments can be used to pay off an existing mortgage, but these loans still come with costs to consider.
Refinancing a Reverse Mortgage
If you have already taken out a HECM loan and you are still having trouble paying for the costs of everyday living, you have options. You can refinance a mortgage, and you apply for a reverse mortgage, but you can also refinance a reverse mortgage. This is often called a “HECM to HECM refinance.”
Buyers may want to refinance their reverse mortgage for two reasons:
- Save money on the loan and get more cash
- Ensure that your spouse will not lose your home after your death
Homeowners over the age of 62 can take out a reverse mortgage. If their spouse is not on the loan, the couple is playing a risky game. If the borrower dies and the spouse is not on the loan, the spouse will need to pay the rest of the loan or risk losing the house. Many borrowers refinance their reverse mortgage to add their spouse onto the loan.
After all parties on the loan pass away, the heirs will decide what is next for the house. They can either pay off the existing loans or refinance the loan and reverse the reverse mortgage back to a traditional mortgage.
What to Consider Before Refinancing a Reverse Mortgage
Borrowers must understand that refinancing a mortgage and refinancing a reverse mortgage are two separate games to play. Home value plays a significant role in whether refinancing a reverse mortgage makes sense.
If, for example, the value of your home has decreased since you took out the reverse mortgage, refinancing may not be the best option.
When should you refinance a reverse mortgage?
- The value of your home has significantly increased since you took out a reverse mortgage
- HECM lending limits have increased since you took out a reverse mortgage
- Principal limits have changed since you took out a reverse mortgage
- Your spouse is not named on the reverse mortgage
- The gain from the refinance outweighs the costs that come with refinancing a reverse mortgage
If refinancing a reverse mortgage makes sense for your financial situation, you will have to qualify before you can change the terms of your HECM loan. The qualifications that apply to the existing reverse mortgage still stand. In order to refinance your reverse mortgage, you will also have to meet these additional qualifications:
- Cash received must be at least 5% of the new loan’s principal limit
- Cash available must be five times greater than the refinancing fees
- At least 18 months have passed since you took out the original reverse mortgage loan
Refinancing a reverse mortgage can be a great option for seniors who want to feel safe about their future and their family’s future. Talk to a financial advisor for more information about refinancing your reverse mortgage.