Many homeowners refinance their traditional mortgages to obtain more favorable terms as they pay down their home loans. However, it’s also possible to refinance a reverse mortgage—a loan that lets older adults tap into their home equity without selling or making monthly payments.
Here’s how a reverse mortgage refinance works, and when it might make financial sense to refinance one.
- A reverse mortgage lets homeowners age 62 or older access their home equity without selling the house or making monthly payments.
- The loan’s repayment is deferred until you sell the home, move out, or die.
- Refinancing replaces an existing mortgage with a new loan that offers better terms.
- Reverse mortgage borrowers might refinance their loans to get more cash, secure a lower rate, or add a spouse to the loan.
What Is a Reverse Mortgage?
A reverse mortgage lets homeowners age 62 or older tap into their home equity. Unlike a traditional (sometimes called forward) mortgage, in which you make regular payments to a lender, a reverse mortgage means that the lender makes payments to you. The loan and interest become due when you sell the house, move out, or die.
While you don’t need to make monthly payments if you have a reverse mortgage, you must pay your property charges (taxes, insurance, any homeowners association fees, and maintenance) on time and keep the home in good condition to avoid default or foreclosure.
What Is Refinancing?
A mortgage refinance happens when you pay off an existing mortgage with money from a new loan. Homeowners generally refinance to secure more favorable loan terms, such as a lower interest rate or a shorter loan term. Your lender uses the new loan to pay off the old one, leaving you with a single loan and one monthly payment.
Mortgage lending discrimination is illegal. You can’t be discriminated against based on race, color, national origin, religion, sex (including gender identity and sexual orientation), familial status, or disability. If you think you have experienced such discrimination, file a complaint with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Development (HUD).
Refinancing a Reverse Mortgage
While refinancing is a popular tool for improving the terms of traditional (or forward) mortgages, it’s also an option if you have a reverse mortgage. When you refinance a reverse mortgage, you essentially trade in your existing loan for a new—and, ideally, better—one. The new mortgage could be either another reverse mortgage or a traditional (or forward) mortgage.
If you opt for a new reverse mortgage, the new loan amount will be based on your age, the home’s value, and the interest rate, just as it would with getting a loan for the first time. You can receive the loan proceeds as a lump sum, a line of credit, regular monthly payments, or a combination of the latter two.
Conversely, if you refinance into a traditional mortgage, the new loan will be contingent on your income, credit score, and interest rate, just as it would with getting a mortgage for the first time. If you need retirement funds, you can choose a cash-out refinance. This type of loan replaces your current mortgage with a larger loan, and you receive the difference in cash.
The most common reverse mortgage is a home equity conversion mortgage (HECM), insured by the Federal Housing Administration (FHA) and offered by FHA-approved lenders.
Reverse Mortgage Refinance Eligibility
The requirements for a reverse mortgage refinance are nearly identical to those for getting a reverse mortgage the first time around. If you want to refinance into a new HECM reverse mortgage, you must:
- Be age 62 or older.
- Own the property outright or have considerable equity in it.
- Live in the home as your principal residence.
- Not be delinquent on any federal debt (e.g., taxes or student loans).
- Have the financial resources to pay property taxes, homeowners insurance, homeowners association fees, and home maintenance.
- Participate in a consumer information session given by a HUD-approved counselor.
- Not have refinanced your reverse mortgage within the previous 18 months.
Additionally, the property must meet FHA requirements, such as being adequately insured and free of health or safety hazards.
While you can access about 50% to 60% of your home equity with a reverse mortgage, you can tap up to 80% with a cash-out refinance.
Reasons to Refinance a Reverse Mortgage
Here are some situations where it might make sense to refinance your reverse mortgage.
- Your home has appreciated in value. If your home’s value has gone up, your home equity also may have increased. If so, you might be able to get more cash from a new reverse mortgage.
- Interest rates have dropped. If interest rates have fallen since you got the original reverse mortgage, it could translate into a larger payout and lower overall interest when the loan becomes due.
- You want to add a spouse or partner. Adding a co-borrower to the loan protects them if you die first, but you have to refinance to do so. You can’t just add someone to an existing reverse mortgage.
- The HECM limits have increased. The reverse mortgage limit for HECM loans is $970,800 for 2022, but the limit was just $625,500 a decade ago. A new reverse mortgage could let you access more equity if limits have gone up.
- You want more cash than your reverse mortgage provides. A cash-out refinance into a traditional mortgage lets you borrow more money than you owe—and you get to pocket the difference in cash.
To make the refinance worthwhile, the financial benefit of refinancing generally should be at least five times the fees. For example, if refinancing costs $5,000, then it should boost your borrowing power by at least $25,000.
If your home’s value exceeds the $970,800 HECM limit, you can opt for a proprietary reverse mortgage, sometimes called a jumbo reverse mortgage, to increase your borrowing power when you refinance.
Reasons to Skip Refinancing a Reverse Mortgage
Of course, a reverse mortgage refinance doesn’t always make sense. Here are some compelling reasons to stick with your existing reverse mortgage.
- The closing costs outweigh the financial benefits of refinancing.
- Your home’s value has decreased since you took out your reverse mortgage.
- You don’t want to increase your debt and make it harder for your heirs to repay the loan if they want to keep the home after you move out or die.
- Adding a younger co-borrower would reduce your loan proceeds (the amount that you can borrow depends on the age of the youngest borrower).
- You think the refinance could be a scam.
Scams involving reverse mortgages happen. If you suspect a scam—or that someone involved in the transaction may be breaking the law—tell your lender or loan servicer and file a complaint with the Federal Trade Commission (FTC), your state attorney general’s office, or your state banking regulatory agency.
What are the pros and cons of a reverse mortgage refinance?
A reverse mortgage refinance can allow you to access more home equity and lower interest rates, as well as set up new payment options. You could also add a new co-borrower to the loan, such as a spouse or partner. On the other hand, refinancing involves fees that can eat into home equity faster and make it hard to pay back the loan.
Can you transfer a reverse mortgage?
No. While some types of mortgages are assumable—meaning that you can shift them from one borrower to another—you can’t transfer a reverse mortgage. However, you can refinance one to add a co-borrower, such as a spouse, partner, or child.
How do you pay off a reverse mortgage?
A reverse mortgage becomes due when the last borrower listed on the loan sells the house, moves out, or dies. Reverse mortgage loans are often repaid using proceeds from the home’s sale.
The Bottom Line
Refinancing a reverse mortgage might make sense if your home’s value has increased or your financial situation has changed since you took out the original loan. You might also get a better deal on a new loan if the HECM loan limits or interest rates have changed. No matter your reason for refinancing, run the numbers to ensure that it makes financial sense—and shop around to find the best deal.