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Reverse Mortgage Refinancing - Is It For You?
by Robin OBrien
Many seniors have taken out a reverse mortgage and are enjoying the benefits of receiving cash from the equity in their home. However, many still find, for various reasons, that the money they receive is still not enough. Refinancing the original loan could be an option, but is it the best option?
Everybody is familiar and feels comfortable with the idea of refinancing an ordinary home equity loan - if you take out a loan and then some time later need extra cash and there's more equity left in the home, many would definitely take a look at raising cash this way. But many seniors who find they need more cash rarely think about refinancing their existing reverse mortgage. Many don't even realize that this is even an option.
In the past there were definite obstacles in the way. For instance, an HECM reverse mortgage incurs a 2% insurance fee on the value of property with a 0.5% annual premium that is deducted from the cash payments. This up front fee reduces the equity that's left in the home and ending the loan, whether by moving, selling or dying means less money for the borrower(s) or heirs. This was further compounded when seeking reverse mortgage financing as an additional 2% would be charged on the total value of the property. So, if the home cost 200,000 dollars when the first loan was taken out, 4000 would be payable, thus reducing the equity to 196,000. Later, if the home value increased to 300,000 and refinancing was sought, an additional 2% would be payable, i.e. 6,000. This would mean total costs of 10,000, making refinancing an expensive proposition.
The Department of Urban Development realized this problem and being keen for seniors to see refinancing as a viable option has changed the insurance so that it's only the value differential that is liable. So, in the above example, the home rose by 100,000 with only a 2% insurance premium of 2,000: total costs would now only be the original 4,000 plus 2,000, a total of 6,000 rather than 10,000.
Also, the obligatory counseling can be waived, in certain circumstance, when refinancing a HECM reverse mortgage.
How do you know if you qualify?
It all depends. If you took out the original loan some years ago and your home's value has increased, then chances are you will definitely qualify. Like applying for the original loan, the value of the home, interest rates and borrower's age are taken into consideration: the higher the value of the home, the older the borrower and the lower the interest rate, the more can be borrowed.
However, if you only took out your original loan quite recently, or your home has not risen significantly in value, refinancing your original reverse option would not be a viable option.
If you think you qualify and believe refinancing your reverse mortgage is right for you, you should first go and talk to the broker you consulted originally. They will be in the best position to advise you on whether this is the best course of action for you.