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Is It Possible To Refinance A Reverse Mortgage, And Is It A Good Idea?

Mar 18

Yes, you can refinance your reverse mortgage to adjust the conditions of the loan refinance or switch to a different form of loan. The procedure is similar to a standard refinancing in that the old mortgage is replaced with a new loan. Refinancing a reverse mortgage, like standard loans, requires borrowers to fulfill eligibility conditions. We'll go through the pros and cons of refinancing a reverse mortgage, as well as when it could be a good idea for you.

Refinancing a reverse mortgage for a variety of reasons

A reverse mortgage is a type of house loan that allows homeowners aged 62 and up to turn the equity in their property into cash. The Home Equity Conversion Mortgage (HECM) is the most prevalent form of reverse mortgage and the only one that is federally insured. In order to qualify, homeowners must have at least 50% equity in their house.

Reverse mortgages are frequently used to augment income in retirement or to support a major cost since the lender makes payments to you. However, a homeowner's decision to refinance a reverse mortgage might be influenced by a number of factors. Here are a few examples.

The kind of rate impacts how borrowers get their payments. Reverse mortgages have either a fixed or adjustable interest rate. Homeowners who have a fixed rate get a flat sum payment, but those who have an adjustable rate can select among monthly payments, a line of credit, or a mix of the two.

Both forms of interest rates and their associated distributions have advantages and disadvantages. A fixed rate is more predictable than an adjustable rate, which is less so. Monthly payments can also help with budgeting, whereas a big sum might be more difficult to spend. Borrowers who have changed their circumstances may seek to refinance their reverse mortgage to adjust the interest rate and payment method.

You're looking for a reduced interest rate

Borrowers with reverse mortgages receive monthly payments, however the interest rate has an impact on the loan balance. Your lender adds interest to the principle each month, increasing the loan debt and decreasing the equity in your house. If interest rates have fallen considerably after you took out the reverse mortgage, refinancing to a lower rate minimizes the amount of interest your lender adds to the debt and slows the rate at which the equity falls.

The HECM loan limitations in your area have risen

The Federal Housing Administration (FHA) sets lending restrictions for reverse mortgages that are insured by them. These limitations fluctuate on a regular basis and are determined by the property's location. Program restrictions may have grown dramatically depending on when a homeowner first took out a HECM. By refinancing the reverse mortgage, they may be able to borrow additional money.

You'd want to switch to a different sort of reverse mortgage

Reverse mortgages are divided into three categories. Refinancing a reverse mortgage to switch to a new loan type is an option for borrowers who have changed their demands.

The value of your home has increased

If the value of the property has grown considerably after the reverse mortgage was taken out, refinancing the loan may allow homeowners to access more of their home equity.

You'd want to include your spouse in the loan

To qualify for a reverse mortgage, homeowners must be 62 or older, so if only one spouse fits the age criteria, they generally become the lone borrower. The amount of a reverse mortgage becomes payable when the last living borrower dies or moves out, so it's in a couple's best advantage to include the younger borrower as soon as they become eligible. Refinancing the reverse mortgage is the only method to add a spouse.

Your heirs are adamant about keeping the house

The reverse mortgage becomes due when the last remaining borrower dies or no longer resides in the residence. To pay off the debt, the owners or heirs usually sell the house. If the heirs wish to keep the house but don't have the finances to pay off the loan, they can convert the reverse mortgage into a standard mortgage and pay off the debt that way.

You require a larger sum of money than a reverse mortgage can give

Other home equity solutions may be able to supply you with more money than a reverse mortgage. A cash-out refinancing, for example, replaces an existing loan with a new one, and the borrower receives a lump sum of money. Refinancing a reverse mortgage to a cash-out refinancing may result in a greater payoff than a reverse mortgage lump sum payment. Borrowers who convert a reverse mortgage to a cash-out refinancing, on the other hand, will have to make payments.

You wish to change your mortgage to a traditional one

Refinancing a reverse mortgage into a standard loan might help borrowers keep more of their home's value or avoid having to sell it to pay off the loan.

Refinancing a reverse mortgage isn't the only option

Here are some more options to explore if refinancing a reverse mortgage is not appropriate for you. These options may be a preferable line of action depending on what you want to accomplish.

Change the payment terms

Borrowers who want to adjust their payment schedule can do so without having to refinance their reverse mortgage. A modify payment option is available on HECMs, which normally requires borrowers to pay a charge.

Refinancing with a cash-out option

If tapping into home equity in one fell swoop is the primary purpose of refinancing a reverse mortgage, homeowners can do it with a cash-out refinance. Borrowers will have to make monthly payments with a cash-out refinance, but they will keep more of their equity than if they refinance a reverse mortgage.

A home equity loan or a home equity line of credit is a type of loan that allows you to borrow money against

Home equity loans and house equity lines of credit (HELOCs) allow homeowners to borrow against their home's value. Borrowers, on the other hand, get loan proceeds in different ways. Homeowners receive a flat sum with a home equity loan, however borrowers with a HELOC can access cash as required within a certain time frame.

Home equity loans and HELOCs, unlike reverse mortgages, require borrowers to make payments; nevertheless, they may have lower fees and can be a less costly option than refinancing a reverse mortgage.