Refinancing a reverse mortgage (HECM to HECM)
There may be times when a homeowner who already has a reverse mortgage wants to refinance the loan. The following specifically examines refinancing an existing federally-insured reverse mortgage, otherwise known as the Home Equity Conversion Mortgage (HECM). Typically a reverse mortgage is the last mortgage a homeowner will take on their home as they age in place. However, when market conditions such as low interest rates and/or rising home values are present, some may qualify to refinance their existing reverse mortgage (HECM) into a new HECM loan. Refinancing in these circumstances could provide access to additional cash (loan proceeds).
These are just a few of the factors taken into consideration to see if one may qualify to refinance their existing HECM (reverse mortgage) loan:
- The current age of the youngest borrower. All Home Equity Conversion Mortgage loans calculate the potential maximum loan amount based on age. The lower the age of the youngest borrower, the less proceeds are available. This leaves room for the mortgage balance to grow (with interest & fees charged) over time as the home value is expected to appreciate modestly each year. The good news is you’re that much older since you took out your first reverse mortgage.
- The current expected interest rate. A low interest rate environment is key to increasing the potential total loan amount and proceeds available. The expected interest rate consists of the loan index plus the lender’s margin. Current interest rates that are significantly lower than when you got your first reverse mortgage (especially if it was a fixed rate) may help you qualify.
- The home’s estimated current value. If home values have appreciated considerably since the first reverse mortgage (HECM) was taken and interest rates are low, borrowers are more likely to have enough loan proceeds available in a new loan to payoff the first HECM and provide access to additional cash.
- The existing reverse mortgage’s balance. Typically HECM borrowers choose not to make monthly payments. Therefore, the loan balance grows each month with the previous month’s principal loan amount, plus FHA insurance premiums, interest rates, and in rare cases servicing fees- becoming the new balance. This negative amortization (increasing mortgage balance) grows more quickly in years with higher rates. Homeowners who took out their first loan in a lower interest rate period would see a more favorable current outstanding mortgage balance owed.
- A new appraisal and underwriting. If the numbers make sense those wishing to refinance their existing HECM loan will start the loan process again with a new loan application. This entails ordering a new appraisal, required HUD HECM loan counseling, and underwriting.
- A credit on your upfront FHA mortgage insurance premium. One of the biggest expenses in your first reverse mortgage was your required upfront (paid at closing) single premium for FHA mortgage insurance. This premium is based on the value of your home up to a maximum home value determined by HUD. Your existing upfront FHA insurance premium paid is credited against your new (higher) premium based on your home’s current appraised value.
Refinancing an existing reverse mortgage (HECM) isn’t for everyone. However, if the net benefit in available loan proceeds are significant, one may choose to pursue a refinance. One should always consider the costs of refinancing versus the net benefit received. Also, homeowners are encouraged to seek the advice of a trusted advisor.