A reverse mortgage can be a good way for seniors to access some of the equity in their home. With a reverse mortgage, a homeowner aged 62 or older with considerable net worth can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a term mortgage, the type used to buy a home, a reverse mortgage does not obligate the homeowner to make any repayments. Instead, the entire loan balance becomes due and payable when the borrower dies, moves permanently, or sells the home.
Several factors affect how much you can borrow with a reverse mortgage: your age, the interest rate offered to you, and the appraised value of your home. If your home is worth more, you will be able to borrow more on your reverse mortgage. This raises an important question. If the value of your property increases, can you get more money from your reverse mortgage?
The short answer to this question is a mixed “yes”. You can get more money, but you will have to refinance your home, which comes with costs. In this article, we walk you through the process.
Key points to remember
- If the value of your home increases, it may be possible to increase the amount you receive from your reverse mortgage. However, the high costs of refinancing mean that it will only make financial sense if house prices have risen significantly.
- In general, refinancing a reverse mortgage should be reserved for situations where a spouse must be added to the loan, more equity is required, or the interest rate may be significantly reduced.
- If you need quick access to more of your home equity, there are other options available to you. These include changing the payment terms of your reverse mortgage, a cash refinance, or taking out a home equity loan or home equity line of credit.
Understanding Reverse Mortgage Payments
First, it’s important to understand how the amount you can borrow through a reverse mortgage is calculated.
The proceeds you receive from a reverse mortgage will depend on the lender and your payment plan. The amount you can borrow for a HECM will be based on the age of the youngest borrower, the interest rate on the loan, and the lesser of the appraised value of your home or the maximum FHA claim amount, which is $970,800 as of January 1, 2022.
The other important factor in the amount you receive from your reverse mortgage is the payment schedule you choose. You can withdraw your reverse mortgage proceeds as a lump sum, equal monthly installments, line of credit, or a combination of these. The equity you have left in your home will depend on the term of your reverse mortgage and the payment schedule you choose.
With all of these factors in mind, we can return to the question we started with. If the value of your home increases, you should be able to increase the amount of money you receive from your reverse mortgage. However, since your reverse mortgage is based on the value of your home at the time you take out the mortgage, you will essentially need to take out a new reverse mortgage, this is called refinancing.
Refinancing a reverse mortgage can be very expensive due to exceptionally high origination fees and other fees. You should carefully consider the cost of refinancing before proceeding and seek advice from a HUD counselor if possible.
Refinance a reverse mortgage
If the value of your home has increased significantly since you took out your reverse mortgage, you may be able to increase your payments by refinancing. Refinancing a reverse mortgage is similar to refinancing a standard mortgage and similar to the process you went through to get your reverse mortgage in the first place. You can refinance a reverse mortgage as long as it has been at least 18 months since you entered into the original reverse mortgage.
First, check your eligibility for a reverse mortgage. Next, shop around for loans, paying particular attention to interest rates, loan terms, and fees. If you find a better deal than you currently have, you can go through the underwriting process (like you did for the original loan) and then close it. At the end of the process, your new reverse mortgage will be used to pay off the old one.
It sounds simple, but the process can be complex and refinancing costs can be difficult to calculate. For this reason, along with the exceptionally high origination fees and other costs of reverse mortgages, refinancing a reverse mortgage should be reserved for situations where a spouse needs to be added to the loan, more equity is needed, or the interest rate can be significantly lowered.
That hasn’t stopped unscrupulous lenders from encouraging seniors to refinance their mortgages, however. And in turn, in 2009, the U.S. Department of Housing and Urban Development (HUD) issued a letter to the mortgagee that established the “five times the benefit rule.” This rule ensures that reverse mortgage refinancing benefits the borrower and protects homeowners from loan rollover, a practice used by predatory lenders to encourage borrowers to refinance a reverse mortgage when there is no benefit to the borrower.
The five times the benefit rule states that the money available to the borrower must be equal to at least five times the refinancing costs, including closing costs. For example, if the fees total $5,000, refinancing the loan must give the buyer access to at least $25,000.
Alternatives to Refinancing a Reverse Mortgage
The costs associated with refinancing a reverse mortgage mean that the value of your home would have to increase significantly for a direct refinance to be profitable in the long term. If you are looking to increase the amount of money you receive from your reverse mortgage, however, there are alternatives to refinancing into another reverse mortgage.
These alternatives include:
- Change your payment terms. Borrowers looking to change the way they receive their payments can do so without having to refinance the reverse mortgage. Some HECMs have a change payment option, which typically requires borrowers to pay a fee, but can then allow you to access more of your home equity through a term payment or of a lump sum.
- Cash refinancing. If you’re looking to access a large amount of equity at once, a cash refinance can help. This means that you must make monthly payments to a lender. However, in the long run, you can retain more of your capital compared to refinancing a reverse mortgage.
- A home equity loan or home equity line of credit (HELOC). HELOCs provide homeowners with access to the equity in their property. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments. On the other hand, they may incur fewer fees and be a cheaper alternative to refinancing a reverse mortgage.
In other words, you have many options for adjusting or renegotiating your reverse mortgage, and the best option will depend on your reasons for doing so. Contact a HUD counselor can be useful if you still don’t know what to do.
Should I refinance a reverse mortgage?
It may make sense to refinance a reverse mortgage if the value of your home has increased significantly. However, refinancing comes with high fees. The financial suitability of refinancing depends on your age, the value of your home, the equity you have and your overall financial goals.
Can I have multiple reverse mortgages?
You can only have one existing Reverse Mortgage at a time. However, borrowers who have paid off a reverse mortgage can obtain another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage into another.
How many times can you refinance a reverse mortgage?
There are rules about how often you can refinance a reverse mortgage. This is to protect homeowners from “loan churning,” a practice used by predatory lenders. You can only refinance a reverse mortgage once every 18 months.
If the value of your home increases, it may be possible to increase the amount you receive from your reverse mortgage. However, the high costs of refinancing mean that it will only make financial sense if house prices have risen significantly. In general, refinancing a reverse mortgage should be reserved for situations where a spouse must be added to the loan, more equity is required, or the interest rate may be significantly reduced.
If you need quick access to more of your home equity, there are other options available to you. These include changing the payment terms of your reverse mortgage, a cash refinance, or taking out a home equity loan or home equity line of credit.