So, what’s a reverse mortgage?
A reverse mortgage is a type of loan that allows you to borrow money against the value of your home.
Unlike a conventional mortgage, the title of your home remains in your name. Besides, you do not remit monthly loan payments to the lender. Instead, you will receive funds from the lender either as fixed monthly payments, line of credit or as a lump sum.
The loan balance accrues interest every month, but the total amount of the loan plus interest cannot surpass the value of your home. The loan becomes due when you no longer live in that house or when you pass away.
Refinancing a reverse mortgage
It is very much possible to refinance a reverse mortgage. Refinancing simply means replacing your existing reverse mortgage with another one, but under different terms.
If the interest rates of your current reverse mortgage have dropped or the value of your home has appreciated, you can talk to your lender to revise the terms of the loan. A reverse mortgage refinance may also be a good option if you want provide more financial security for your spouse or heirs.
The lender will pay off your current mortgage and issue you a new reverse mortgage under new terms. The mortgage will certainly have lower interest rates with better payout terms.
As much as refinancing a reverse mortgage is beneficial, it comes at a cost. The closing costs for a reverse mortgage refinance will include origination fee, servicing fee, mortgage insurance, title insurance, survey fee and other expenses typical with all types of loans.
With this in mind, it is a good idea to weigh the amount of money you expect to gain in savings against the closing costs to decide whether it makes economic sense to refinance your reverse mortgage.
Who is eligible for a reverse mortgage refinance?
As you probably know, a reverse mortgage is only available to homeowners aged 62 years or older and they have sufficient home equity. The home must be their primary residence and they should not be delinquent to federal debt.
Moreover, applicants must demonstrate their ability to meet financial obligations like paying property taxes and home insurance.
The criteria used to check eligibility for reverse mortgage refinancing is not much different from the requirements of a reverse mortgage. However, you can only apply to refinance your mortgage no earlier than 1 ½ years or 18 months from when you closed your original reverse mortgage.
Then again, the increase in the amount you can draw must be equal to the closing costs or more than five times as large. Proceeds from the loan must be at least 5% of the amount being refinanced.
Factors to consider before getting a reverse mortgage refinance
A reverse mortgage refinance might seem like a good plan for your financial security. However, you must focus on two vital points to determine whether a refinance is beneficial. These include:
1. Increase in credit line
If your credit line, annuity or term payments increase by a significant margin, then a reverse mortgage refinance would be a sound decision. Changes in the value of your property and the amount of equity you have already used will determine the increase in credit line.
2. Total refinance cost
The total refinance cost will determine whether or not refinancing your mortgage is a good idea. The good news is that closing costs are usually negotiable, meaning your lender can give a deal worth considering. Depending on the lender and the size of your loan, you should expect to pay anything from 2% to 6% of the principal amount.
The lender is required by law to provide you with information on the increase in the amount you can draw and the total refinancing costs.
Is a reverse mortgage refinance worth it?
Refinancing your reverse mortgage comes with several benefits. These include:
- Access to more equity and more cash
- Lower interest rates on your mortgage
- Higher borrowing limits
- Increase in credit line
- More security for your spouse if you add them to the loan
Potential drawbacks of a reverse mortgage refinance
Like any other loan, refinancing a reverse mortgage has a few drawbacks. These include:
- Fewer assets to your heirs
- Increasing loan balance
- You have to pay closing costs
A reverse mortgage refinance is like a double-edged sword. It can be good for you but not ideal for another individual. With this in mind, it is always a good idea to evaluate what is on offer before deciding to refinance your mortgage. Start by calculating how much you stand to gain against the closing costs to determine whether refinancing is right for you.