While a reverse mortgage is different from a conventional mortgage, the two products have a few similarities. One is that the homeowner may refinance a reverse mortgage at any time during the life of the loan without penalty.
When Refinancing a Reverse Mortgage Makes Sense
As with a conventional mortgage, the borrower has the option to refinance into a more suitable loan that fits their needs. Some situations that may warrant a refi of a reverse mortgage include:
- More favorable interest rates. Like a conventional mortgage, the reverse mortgage market allows borrowers to lock in lower interest rates, which may reduce the amount due when the loan matures.
- Life event. If a borrower initially took out a reverse mortgage without their spouse being named on it, they can easily refinance and add their spouse’s name to the loan if a life event, such as a marriage, occurs.
- Property value has increased significantly. Locking in a lower interest rate may also mean that a borrower can qualify for a larger loan.
How Refinancing a Reverse Mortgage Works
Refinancing a reverse mortgage is similar to refinancing a conventional loan. However, a refinanced reverse mortgage will still have the specific requirements universal to home equity conversion mortgages and many proprietary reverse mortgages.
- The prospective borrower must typically be 62 years of age or older.
- They must maintain the property they are refinancing as their primary residence.
- There also must be enough equity for the borrower to qualify for a reverse mortgage.
- The borrower also must have adequate income to maintain the property, including paying taxes, insurance, and any HOA or association dues.
- Different lenders may have additional requirements for which reverse mortgages are eligible for refinance.
In addition to those requirements, the borrower must sign an anti-churning disclosure at closing. This disclosure is intended to prevent “churn” or the predatory tactic of repeatedly refinancing mortgages to accrue fees and closing costs.
Considerations to Make Before Choosing to Refinance
Borrowers may have different life circumstances that call for refinancing their reverse mortgage. However, it is wise to consider if the process makes the most sense for your situation before refinancing. Some considerations to make before deciding:
- Do you hope to pass on the equity in your home to your heirs?
- Will the refinance adversely affect cash flow during retirement?
- Is the interest rate differential beneficial enough to affect my finances?
- Am I working with a trusted lender?
As with all significant financial matters, discuss any major decisions with a qualified financial advisor and know your options before proceeding.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.