Refinancing a reverse mortgage: What to know

If you’re 62 or older, you may be able to access the equity in your home with a reverse mortgage. While you don’t have to repay a reverse mortgage, a time may come when you — or your beneficiaries — might want to refinance the loan.

• What is a reverse mortgage?
• Can you refinance your reverse mortgage?
• How a reverse mortgage refinance works
• Reverse mortgage refinance guidelines and eligibility
• Advantages of refinancing a reverse mortgage
• Drawbacks of refinancing a reverse mortgage
• Alternatives to a reverse mortgage refinance
• Should you refinance a reverse mortgage?

What is a reverse mortgage?

A reverse mortgage is a unique home loan that’s the opposite of a traditional mortgage. Instead of making payments to a lender, the lender makes payments to you — the homeowner — up to the total equity in the home. You typically don’t have to make monthly payments on the loan as long as you live in the home.

While the lender is essentially paying you, a reverse mortgage is still considered a loan. You’ll accrue interest on the loan as your loan balance goes up over time, and you or your beneficiaries will repay the loan once you die or move out. This is often done by selling the property.

Before you take out a reverse mortgage loan, you’ll need to consider which of the three different types of reverse mortgage best suits you:

• Single-purpose reverse mortgage — This type of reverse mortgage allows you to only use the funds for a predetermined purpose, like making home repairs. Some states and local governments offer these reverse mortgages for low-income homeowners, but they’re not widely available to many borrowers.
• Proprietary reverse mortgage — You can get proprietary reverse mortgages from private lenders like banks, credit unions, and online lenders. They usually offer higher advances, but the government doesn’t insure them.
• Home Equity Conversion Mortgage (HECM) — A HECM is the only type of reverse mortgage backed by the federal government. There’s no restriction on the use of funds from a HECM. These loans often come with upfront costs and fees.

Can you refinance your reverse mortgage?

You can refinance a reverse mortgage, and for some borrowers, refinancing might offer significant benefits. Refinancing a reverse mortgage could allow you to access more equity in your home. Additionally, you may be able to lower the interest rate on your mortgage. You can refinance a reverse mortgage multiple times, but you must wait between refinances — usually 18 months.

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How a reverse mortgage refinance works

Refinancing your reverse mortgage is largely the same as refinancing any other home loan. One key difference is that you’re not obligated to repay a reverse mortgage until you move out of the house or die.

Qualifying for a refinance is much like qualifying for a reverse mortgage. You’ll need to undergo a similar underwriting process, and your lender will ask for an appraisal on the home. If you’re taking out a HECM, you and your house must also meet FHA requirements, including proper upkeep and on-time property tax payments.

You can either refinance into a new reverse mortgage or refinance into a traditional home loan when you refinance a reverse mortgage. Your decision will vary depending on your needs.

Reverse mortgage refinance guidelines and eligibility

It’s possible to refinance a reverse mortgage, but you must meet these requirements before you’re eligible to move forward:

• You must be 62 years or older. Borrowers must be at least 62 years old to get a reverse mortgage or refinance a reverse mortgage.
• You must maintain the home as your primary residence. Reverse mortgage borrowers must use the home as their primary residence. The lender can demand repayment for your loan if you’re absent for more than 12 consecutive months, including long-term healthcare facilities.
• You should have significant equity. Aim to have at least 50% equity in the home for a reverse mortgage refinance. Additionally, the money available through a refinance must be at least five times the cost of refinancing.
• You must wait after obtaining your reverse mortgage to refinance. All reverse mortgage refinances have a waiting period. You typically need to wait 18 months before you can refinance a reverse mortgage.
• You must be current on property maintenance and taxes. All reverse mortgages require borrowers to keep the home well-maintained (to FHA lending standards) and to stay current on property taxes and HOA fees.
• You should be able to show financial stability. While there are no minimum income requirements, the lender will want to see that you can pay taxes, maintain the property, and cover homeowners insurance.

Advantages of refinancing a reverse mortgage

When considering a reverse mortgage refinance, be sure to weigh the benefits with the drawbacks. Some of the most notable benefits of refinancing a reverse mortgage include:

• Lower your interest rate. The lender of your reverse mortgage charges interest on the loan, even though you aren’t required to make payments. If you want to sell your home or your beneficiaries want the option of owning the property after you die, the lender will require that you repay the loan. Refinancing could lower lifetime interest costs and make it more affordable to repay the loan.
• Access more money. If your home’s value has increased or you’ve repaid some of your reverse mortgage, you could access additional funds with a refinanced reverse mortgage.
• Switch from a variable-rate mortgage to a fixed-rate mortgage. Another way to potentially save money on the reverse mortgage is to switch to a fixed-rate mortgage. Switching to a fixed rate ensures that the interest rate stays the same and any monthly payments remain stable.
• Add your spouse to the reverse mortgage. If your spouse isn’t already on the reverse mortgage, you can add them through a refinance. Spouses not listed on the reverse mortgage may not be able to stay in the home after the borrower dies, so adding them to the loan can allow them to stay in the home without worry.

Drawbacks of refinancing a reverse mortgage

Like all loans, refinancing a reverse mortgage does have its share of potential drawbacks:

• Closing costs — As with a traditional mortgage refinance, a reverse mortgage refinance comes with closing costs. You’ll likely need to pay a loan origination fee, closing costs pertaining to the property (like appraisal, title search, and recording fees), and an initial mortgage insurance premium. HECM borrowers will also need to receive housing counseling. Do the math to ensure that any benefit you receive from refinancing exceeds the initial loan cost.
• Taking on additional debt — Refinancing your reverse mortgage could mean additional debt, especially if you plan to draw more equity from the property. Even if you live out your life in the home and don’t repay the loan, your beneficiaries will need to repay it if they wish to hold onto the property.
• May affect your inheritance plans — Beneficiaries who inherit a home with a reverse mortgage may be able to keep the property. However, if they want to keep the house, they’ll need to repay either the reverse mortgage balance or 95% of the home’s appraised value, whichever amount is less.
• Stress for your heirs — Beneficiaries have 30 days after receiving the payment due notice to decide whether they’ll purchase the house, sell the home, or return the property to the lender. Dealing with financial and estate issues can make what’s likely a stressful time even more stressful. Also, if you refinance a reverse mortgage for additional funds, this could increase the amount your heirs will need to repay to keep your home after you’re gone.

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Alternatives to a reverse mortgage refinance

While refinancing your reverse mortgage has a number of benefits, it may not be the best option for you. Before jumping in, here are a few alternatives to consider:

Modify the payment terms

Instead of paying thousands of dollars for a refinance, consider asking your lender to modify the payment terms of your loan. Your lender doesn’t have to agree if you ask, but it could save you money and make it easier to repay the loan when it comes due.

Refinance into a conventional mortgage

You can still get a traditional home loan even if you have a reverse mortgage. This option can help you preserve any remaining equity in your home, but you’ll also need to make sure you can afford the new monthly payment.

Cash-out refinance

A cash-out refinance is a new loan. When you choose a cash-out refinance, you trade in your old mortgage for a new, larger loan. The lender pays you the difference between what you owe on your home and the current market value as a cash payout. The risk here is that your mortgage loan is now bigger, and your monthly payments may be larger than before.

Sell your home and downsize

You could sell your home and move to a smaller property if you need more money. Downsizing could also allow you to move to a space where you don’t have to worry about maintenance, and you might be able to lower your utility bills as well.

Just remember that if you sell a home with a reverse mortgage, you’ll need to repay the loan balance before you see any profit from the sale of your home.

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Should you refinance a reverse mortgage?

Refinancing your reverse mortgage has benefits, but you should still take time to decide if it’s the right decision for your financial situation.

Some common reasons that borrowers with a reverse mortgage consider refinancing include:

• Adding their non-borrowing spouse onto the loan
• Obtaining a lower interest rate than what they have on their reverse mortgage
• Accessing additional funds (if there’s more equity in the property)
• Changing loan terms (from an adjustable-rate mortgage to a fixed-rate mortgage)
• Adjusting the type of reverse mortgage you have
• Refinancing back into a traditional mortgage

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