Refinancing a Reverse Mortgage
A Home Equity Conversion Mortgage (HECM), or reverse mortgage, is unlike a traditional mortgage. While it’s still a loan, the program is limited to those over the age of 62. In addition, repayment can be deferred as long the property remains the primary residence of the borrower. However, a HECM does share some similarities with other types of mortgages.
One of the opportunities that remain mostly unchanged is your ability to refinance. In some instances, the reasons for doing so mirror those of younger borrowers. In other cases, refinancing a reverse mortgage could be necessary to protect your loved ones as you age.
Current mortgage interest rates are near their lowest levels ever and are expected to remain historically low. Most people think of refinancing as a way to lower mortgage payments. Since reverse mortgages already offer a deferred payment, the goal is slightly different.
Transitioning to a new reverse mortgage with lower interest charges can increase the amount of equity you can access. Larger monthly payouts or an additional lump sum payment may be enough to justify refinancing. The lower rate will also reduce the portion of repayment that goes toward interest charges.
Just remember that the cost of refinancing is part of the equation when determining whether to proceed. Also, a HECM must be in place for at least 18 months before you may refinance it.
Recently, a shortage of homes for sale and increased demand from buyers have driven up property values throughout the country. A substantial jump in equity due to rising home prices can be another reason to refinance a reverse mortgage.
While the transaction costs still need to be taken into account, tens or even hundreds of thousands of additional dollars may now be accessible to HECM borrowers in markets where home values have doubled or more in recent years.
Refinancing a reverse mortgage can also be necessary for reasons that are unique to this type of loan. In many cases, spouses were co-borrowers during the initial reverse mortgage. In scenarios where that wasn’t the case, such as younger, ineligible partners, refinancing can provide added protection if a non-borrowing spouse is the only remaining occupant of the home.
Reverse mortgages that began after August of 2004 automatically give non-borrowing spouses the ability to remain in a home if the borrower passes away or has to leave the house. Although, the lender may discontinue any remaining payments from the HECM. Also, marriages that occurred after the origination of a reverse mortgage may mean the new spouse has to immediately repay the loan or face foreclosure when their partner no longer resides at the property.
The best way to guarantee that your non-borrowing spouse can continue to benefit from a HECM or that your new spouse can remain in the home could be to refinance when they are eligible to become a co-borrower.
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- At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds
- Charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees
- The loan balance grows over time and interest is charged on the outstanding balance
- The borrower remains responsible for property taxes, hazard insurance, and home maintenance, and failure to pay these amounts may result in the loss of the home
- Interest on a reverse mortgage is not tax-deductible until the borrower makes partial or full re-payment