We occasionally receive emails from folks who already have a reverse mortgage, typically a Home Equity Conversion Mortgage (HECM), and are wondering if it’s possible to refinance it. The simple answer is yes, it’s possible. Refinancing can be a means of increasing the amount of money you’re eligible to receive from the loan, and it can also protect your spouse from losing the home if you pass away first. Though we can’t make a recommendation of what you should do – every situation is unique – we’ll cover what refinancing means and how to think through the decision.
More Complicated than Conventional Home Loans
Refinancing is common for homeowners with a conventional mortgage. In fact, there’s even a ‘rule of thumb’ which states that you should only think about taking action if interest rates have fallen by 2% or more. To give you a concrete example, the rule of thumb would tell a borrower with a home loan at 5% to begin thinking about refinancing once interest rates hit 3%. Most conventional refinances are done to save money on interest payments, and this rule of thumb captures the trade off between saving on interest and paying for the new loan.
With reverse mortgages, it’s more complicated. First, you may be looking to refinance because it’ll increase the amount that you can draw. This could be true if:
- Interest rates have dropped
- Your property value has increased
- Principle limit factors have changed in your favor
You may also be making the decision for other reasons:
- Your spouse is not named on the current HECM loan, and you plan to add her to ensure that the loan does become due if you pass away
- You are one of the rare borrowers with a proprietary reverse mortgage and want to ‘refinance’ into a HECM
Of course, there are closing costs associated with a reverse mortgage refinance. These are the same costs that must be paid with a new loan, which we cover here. The one exception is that the borrower must only pay a mortgage insurance premium on the increase in the home’s value.
Working Toward a Rule of Thumb
Most reverse refinances are what is referred to as HECM to HECM. The US Department of Housing and Urban Development (HUD) defines this as:
A HECM refinance case is the refinance of an existing HECM with a new HECM for the same borrower and same property with different loan specifications.
Although there is no popular rule of thumb, we can look at the guidance that HUD provides and draw some conclusions about when it might make financial sense for a borrower to refinance. As you probably know, counseling is required for first time HECM borrowers. It is required to refinance as well, though it is waived if the following is true:
The increase in the mortgagor’s principal limit (as estimated by the lender and provided to the borrower in Block #2 of the Anti-Churning Disclosure form) exceeds the total cost of the refinancing by an amount equal to five (5) times the cost of the transaction.
This is sometimes referred to as the “refinance benefit factor”, and the idea is fairly straightforward – if you stand to gain five times the financial benefit from refinancing over the closing costs that you must pay, it begins to make sense to consider it.
A Concrete Example
Let’s imagine that you have a HECM loan with an initial principal limit of $150,000. You look to refinance it and access your options.
You discover that your are eligible for a new principal limit of $200,000. This represents an increase of $50,000 ($200,000 – $150,000). The lender estimates your closing costs at $5,000.
In this case, your refinance benefit factor is 10 ($50,000 / $5,000), and it probably makes sense to consider.
You discover that you are only eligible for a new principal limit of $160,000. This represents an increase of $10,000 ($160,000 – $150,000). The lender estimates your closing costs at $5,000.
In this case, your refinance benefit factor is 2 ($10,000 / $5,000), and it probably doesn’t make sense to consider.
Other Factors to Consider
Every situation is different, and there are likely cases where someone faced with scenario A would not refinance while someone faced with scenario B would. For example, an individual faced with scenario B may find that adding a spouse to the loan or giving added protection to a non-borrowing spouse through refinancing still makes the decision worthwhile.
HECM Refinance Statistics
How popular is reverse mortgage refinancing among borrowers? To try to answer this question, we examined the HECM originations that are classified as ‘refinance’. To date, we count over 20,000 loans beginning in 2009. Here are the refinances per month beginning in 2015:
Top Refinance Reverse Mortgage Lenders
Here is a list of the top lenders by origination totals since 2015:
|1||AMERICAN ADVISORS GROUP||909|
|2||NATIONWIDE EQUITIES CORPORATION||672|
|3||NET EQUITY FINANCIAL INC||525|
|4||THE FEDERAL SAVINGS BANK||330|
|5||GOLDEN YEARS MORTGAGE SOLUTIONS||273|
|6||REVERSE MORTGAGE SOLUTIONS INC||265|
|7||URBAN FINANCIAL / FINANCE OF AMERICA||244|
|9||HIGH TECH LENDING INC||228|
Underwriting: HECM-to-HECM Refinances – very helpful to us, though perhaps too technical for the average consumer
HUD: Refinancing Existing HECMs – guidance from HUD to lenders, this is a Word document rather than a webpage