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Can You Refinance a Reverse Mortgage and Is It a Smart Move?
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Yes, you can refinance a reverse mortgage to change the existing loan terms or move to a different type of mortgage. The process is similar to a traditional refinance in that it replaces the existing mortgage with a new loan. Also, like traditional loans, borrowers must meet eligibility requirements to refinance a reverse mortgage. We’ll explore the ins and outs of refinancing a reverse mortgage and when it might work for you.
Reasons to refinance a reverse mortgage
A reverse mortgage is a home loan that allows homeowners 62 or older to convert their home equity into cash. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM) and the only one insured by the federal government. To qualify, homeowners typically must have at least 50% equity in their home.
Because the lender makes payments to you in a reverse mortgage, borrowers often use reverse mortgages to supplement income in retirement or fund a large expense. However, multiple scenarios may lead a homeowner to refinance a reverse mortgage. Here’s a look at a few.
You want to go from an adjustable rate to a fixed rate or change how you receive your money.
Reverse mortgages have either a fixed interest rate or adjustable rate and the type of rate determines how borrowers receive their payments. Homeowners with a fixed rate receive a lump sum payout, while those with an adjustable rate can choose between monthly payments, a line of credit or a combination of the two.
There are benefits and drawbacks to both types of interest rates and the related payouts. A fixed rate is predictable, while adjustable rates are less stable. And monthly payments can be beneficial for budgeting, whereas a lump sum can be easier to spend through. Borrowers who have a change in circumstances may want to refinance a reverse mortgage to change the interest rate type and how they receive their payments.
You want to get a lower interest rate.
While reverse mortgage borrowers receive monthly payments, the interest rate affects the loan balance. Each month your lender adds interest to the principal, which causes the loan balance to grow and the equity in the home to decrease. If interest rates have dropped significantly since you initially took the loan out, choosing to refinance the reverse mortgage to a lower rate reduces the amount of interest your lender adds to the balance and slows down the rate at which the equity decreases.
Your local HECM loan limits have increased.
The Federal Housing Administration (FHA) establishes loan limits for their insured reverse mortgages. These limits change periodically and depend on the location of the property. Depending on when a homeowner initially took out a HECM, program limits may have increased significantly. They may be able to borrow more by choosing to refinance the reverse mortgage.
You want to switch to a different reverse mortgage type.
There are three types of reverse mortgages. Borrowers who have a change of needs may want to refinance a reverse mortgage to move to a different loan type.
- Single-purpose reverse mortgages: These loans are available through some state and local government agencies or nonprofit organizations. They are usually for smaller amounts and may only be used for specific purposes, for example, home improvement or property taxes.
- Proprietary reverse mortgages: Some private lenders offer reverse mortgages that the government does not guarantee. Often, these reverse mortgages enable homeowners to borrow above FHA limits.
- Home Equity Conversion Mortgages (HECMs): These reverse mortgages are insured by FHA and are subject to established loan limits.
Your home’s value has gone up.
Choosing to refinance a reverse mortgage can allow borrowers to access more of their home equity if the property’s value has increased significantly since taking out the loan.
You want to add your spouse to the loan.
Homeowners must be 62 or older to qualify for a reverse mortgage, so often, if only one spouse meets the age requirements, they become the sole borrower. However, the balance of a reverse mortgage becomes due when the last surviving borrower dies or no longer lives in the home, so it’s in a couple’s best interest to list the younger borrower as soon as they become eligible. The only way to add a spouse is to refinance the reverse mortgage.
Your heirs want to keep the home.
Once the last surviving borrower dies or no longer lives in the home, the reverse mortgage becomes due. In most cases, the homeowner or heirs sell the home to pay off the loan. However, if the family members who inherit the house want to keep it but don’t have the funds to pay off the loan, they might refinance the reverse mortgage as a traditional mortgage and pay back the debt that way.
You need more cash than a reverse mortgage provides.
Other home equity options might provide more cash than a reverse mortgage. For example, a cash-out refinance replaces the existing loan with a new loan and the borrower receives a lump sum of cash. Refinancing a reverse mortgage to a cash-out refinance may give a borrower a larger payout than the lump sum payment from a reverse mortgage. However, borrowers who refinance a reverse mortgage to a cash-out refinance will need to make payments.
You want to refinance into a traditional mortgage.
Borrowers may want to refinance a reverse mortgage into a traditional loan in order to preserve the remaining equity in the home or to avoid selling the house to pay off the loan.
How to refinance a reverse mortgage
The steps to refinance a reverse mortgage are similar whether you’re moving into another reverse mortgage or a traditional loan. However, your eligibility requirements will depend on what type of loan you’re refinancing to.
| How to refinance a reverse mortgage to a new reverse mortgage | How to refinance a reverse mortgage to a traditional mortgage |
| → Check your eligibility. You must meet borrower and property qualifications to refinance a reverse mortgage. Depending on the type of reverse mortgage you’re applying for, you’ll need to meet FHA requirements or those in place at the private lender, local government or nonprofit organization.
→ Shop around for loans. Compare interest rates and loan terms among multiple lenders. → Apply for the loan. You’ll need to supply your financial and property information to your lender. → Proceed with underwriting. If approved, your loan will move to the underwriting process. Your lender will order a home appraisal, and you may need to provide additional information. → Close on the loan. Once the underwriting process is complete, you’ll close on the loan. You’ll need to pay closing costs, upfront fees, review final loan documents and decide how you wish to receive the funds. |
→ Check your eligibility. Depending on the type of mortgage you’re applying for, you’ll need to meet the loan program’s borrower and property requirements.
→ Shop around for loans. Compare interest rates and loan terms among multiple lenders. → Apply for the loan. You’ll need to supply your financial and property information to your lender. → Proceed with underwriting. If approved, your loan will move to the underwriting process. Your lender will order a home appraisal, and you may need to provide additional information. → Close on the loan. Once the underwriting process is complete, you’ll close on the loan. You’ll need to pay closing costs and review final loan documents. |
The five times benefit rule
The “five times benefit rule” ensures that refinancing the reverse mortgage benefits the borrower. It protects homeowners against loan churning — a practice used by predatory lenders to encourage borrowers to refinance a reverse mortgage when there is no advantage to them.
The five times benefit rule states that the money available to the borrower must equal at least five times the refinancing fees, including closing costs. For example, if fees total $5,000, the loan refinance must give the buyer access to at least $25,000.
Pros and cons of refinancing a reverse mortgage
Before deciding to refinance a reverse mortgage, be sure to consider the risks and benefits to determine if this move makes sense for your situation.
| Pros | Cons |
| Can provide access to more home equity.
Can lower the interest rate on the loan. Can change the payment option and interest rate type. Can preserve remaining equity in the home (if refinancing to a traditional loan). Can slow down the pace at which home equity decreases. |
Incurs additional fees.
Closing costs and fees can eat into home equity faster. Can make it harder to pay back the loan. Can increase total debt amount. Can be hard to qualify for. |
Alternatives to refinancing a reverse mortgage
If you decide refinancing a reverse mortgage is not right for you, here are some other options to consider. Depending on what you’re looking to achieve, these alternatives may provide a better course of action.
Modify payment terms
Borrowers looking to change how they receive their payments can do so without having to refinance the reverse mortgage. HECMs have a change payment option, which typically requires borrowers to pay a fee.
Cash-out refinance
If the primary goal of refinancing a reverse mortgage is to tap into home equity in one shot, homeowners can achieve that with a cash-out refinance. Of course, borrowers will make monthly payments with a cash-out refinance; however, they may preserve more of their equity compared to refinancing a reverse mortgage.
Home equity loan or home equity line of credit
Home equity loans and home equity lines of credit (HELOCs) provide homeowners access to home equity. But the way borrowers receive the loan proceeds differs. With a home equity loan, homeowners receive a lump sum, while borrowers access funds as needed within a specific time frame with a HELOC.
Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments; however, they may come with fewer fees and can be a less expensive alternative to refinancing a reverse mortgage.
FAQs about refinancing a reverse mortgage
Should you refinance a reverse mortgage?
Choosing to refinance a reverse mortgage can make sense in some instances. However, it depends on multiple factors such as your age, the value of your home, how much equity you have and your overall financial objectives. A financial advisor or HUD counselor can help you determine if you should refinance a reverse mortgage.
Can you refinance a reverse mortgage into a conventional loan or other mortgage?
Yes, you can refinance a reverse mortgage into a conventional loan or another mortgage type. You’ll need to meet eligibility requirements for the new loan, which will depend on how much equity you have in your home, your ability to handle the mortgage payments, credit score and additional factors.
How many times can you refinance a reverse mortgage?
HUD rules limit borrowers from refinancing a reverse mortgage too often to prevent homeowners from becoming victims of loan churning, a practice some reverse mortgage lenders promote to collect fees from borrowers. HUD rules state borrowers can refinance a reverse mortgage no more often than once every 18 months.
What are the closing costs and fees involved in refinancing a reverse mortgage?
Borrowers will pay reverse mortgage fees both at closing and throughout the life of the loan, depending on the loan they refinance to. Borrowers who refinance a reverse mortgage to another one can expect to pay the following fees:
- An initial mortgage insurance premium (MIP) of 2%. Borrowers may be eligible for reduced MIP.
- An annual MIP of 0.5% of the loan balance
- An origination fee of up to $6,000
- Third-party fees for an appraisal, title search, recording fees and other services necessary to close
- Monthly servicing fees up to $35. (Some lenders may offset the servicing fees by charging a higher interest rate.)
Homeowners have the option of financing some of the fees, which will decrease the loan proceeds. Borrowers who refinance a reverse mortgage to another loan type may have other costs depending on the mortgage.
Can you take out a second reverse mortgage?
Borrowers can only have one existing reverse mortgage at a time. However, borrowers who have paid off a reverse mortgage can get another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage to another one.