Many senior homeowners are familiar with reverse mortgages. However, only a few know about reverse mortgage refinancing. What is it and how does it work? Most importantly, what are the steps needed to accomplish the reverse mortgage refinance process?
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The Basics
Reverse Mortgage Defined
A reverse mortgageis a type of loan specifically designed for older homeowners that enables them to tap into their home’s equity and take out the cash for personal financial purposes. This type of loan does not require the borrower to pay monthly dues, unlike conventional loans.
When is it Repaid?
The loan only gets repaid once the borrower moves out of the house, sells the property, or passes away.
How Does it Work?
The lending, banking, or financial institution is the one who makes payment/s to the borrower depending on the percentage of accumulated home equity in the homeowner’s property.
Who are Eligible?
Homeowners 62 years old and above who have small mortgages or own their homes outright.
Are There Restrictions as to How the Money is Used?
No. The borrower can use the money s/he gets from the mortgage for whatever purpose s/he deems fit.
Is Refinancing Possible for Reverse Mortgages?
Yes.
Refinancingcan be a good thing for borrowers who are not planning on moving anytime in the future, can afford cost that comes with repairs, property tax, and other maintenance fees, or those who want to keep the money to save for rainy days or to simply supplement their income.
To help you make a clearer assessment, look thoroughly into these factors and answer these questions before considering a reverse mortgage refinance:
- Do I currently have a significant accumulated equity in my property?
- Do I pass the HUD’s “5-Times Benefit Rule”?
To determine this, calculate all the cost associated with getting the new loan and multiply this by five (5). If you do not get an amount higher than the determined estimate in your new loan, you might want to reconsider getting a refinance.
Take note that if you do not pass this rule, you are mandated to take another session of the FHA’s reverse mortgage counseling to make sure you understand the risk of refinancing your existing reverse mortgage.
- Am I getting at least 5 percent of the available principal limit in additional mortgage proceeds?
- Is my interest rate more likely to improve by refinancing my current reverse mortgage?
- Do I need to add or remove a borrower from my mortgage?
PROS
Refinancing a reverse mortgage is advantageous when:
- The rates have lowered and the current rate climate allows you to save on interest. Experts advise that a 2 percent fall on rates is usually a green light to refinance.
- You want to switch from an adjustable rate to a fixed-rate mortgage.
- The current market value of your home has appreciated which means more equity you can tap into and cash out.
- You need to add or remove a borrower from your mortgage.
- You want to switch to the FHA-insured HECM or Home Equity Conversion Mortgage Program.
CONS
On the other hand, you might want to consider and be ready for the following when you choose to push through with refinancing:
- High fees and other costs in closing
- Property taxes, insurance, and repair costs, among others
- Taking out the loan might mean complicating your wish to keep house for the family’s future use
If you have evaluated all aspects of your current financial situation: risk vs gain, and determined that you stand to benefit more from refinancing, then it’s time to start your refinancing journey.
Eligibility:
- Borrower must be 62 years old or older
- The property must be the borrower’s primary residence
- Borrower must participate in the counseling session (save when s/he passes the 5-Times Benefit Rule)
- Property must meet FHA property qualifications/standards
- Borrower must be financially capable to carry the burden of paying for home maintenance and other fees associated with needed repairs, insurance, and property taxes
What factors determine the loan amount I get?
- Age (of the youngest spouse in case of couples)
- Current interest rates
- Home value
- The HECM FHA mortgage limit which is $625,500 or the lesser of the appraised value
Step by Step Process of Reverse Mortgage Refinancing
- Submission of new mortgage application.
Thoroughly fill out the form. Here, you will choose the mode of payment you prefer which is either through:
- Monthly Disbursements/Income for Life or Fixed-Term
- Lump Sum in Cash
- Line of Credit
- Or a combination of the above three
- Counseling
Attend another counseling session by an FHA-approved reverse mortgage counselor (or not, if you pass the 5-Times Benefit Rule set by the HUD). To arrange for counseling, contact and schedule a meeting with a member of the National HECM Counseling Network or directly contact the HUD.
- Processing.
Your application will go through the hands of your lender who will be the one in charge for assessing your creditability, arranging for lien payoffs, ordering the appraisal and title reports, etc.
- New Appraisal.
The appraisal, as you may already know, will determine the market value of your home. It also tells the kinds of repairs that might have to be done to the property which is required for closing.
- Underwriting.
Your lender finalizes the paperwork upon receipt of all necessary documentations and prepares them for approval.
- Closing.
After the application has been approved, a date will be scheduled for closing. You will be presented with papers for signing.
- Disbursement of funds.
Cancellation period is often up to three business days. After this period expires, loan funds will be disbursed and you will start getting the payments due according to the mode of payment you chose.
- Repayment.
Since there are no monthly payments for reverse mortgage, the due is paid in full when:
- the borrower moves out and the house is no longer considered his/her primary residence
- the house is sold
- the borrower passes away – in which case the bank or lender sells the home or refinances its existing mortgage to settle the debt. The equity that remains (if there is) is given to the rightful heir/s of the borrower.
Refinancing might be something you want to consider and plan with your loved ones. Take all factors into consideration and weigh the benefits in the short and the long term. Give us a call to get professional guidance.
