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 who is age 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit.
Unlike a forward mortgage—the type used to buy a home—a reverse mortgage doesn’t require the homeowner to make any loan payments. Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home.
Several factors affect the amount that you can borrow through a reverse mortgage: your age, the interest rate that you are offered, and your home’s appraised value. If your house 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 qualified “yes.” You can get more money, but you’ll have to refinance your house, and that comes with costs. In this article, we’ll explain the process.
There are three types of reverse mortgages. The home equity conversion mortgage (HECM), which represents almost all of the reverse mortgages that lenders offer on home values below $970,800, is the type that this article will discuss. HECMs are reverse mortgages insured by the Federal Housing Administration (FHA). If your home is worth more, however, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.
- If the value of your home rises, it might be possible to increase the amount that you receive from your reverse mortgage. However, the high costs of refinancing mean that this 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 needs to be added to the loan, more equity is needed, or the interest rate can be lowered substantially.
- If you need to access more of your home equity quickly, other options are available to you. These include modifying your reverse mortgage payment terms, getting a cash-out refinance, or taking out a home equity loan or a home equity line of credit (HELOC).
Understanding Reverse Mortgage Payments
First, it’s important to understand how the amount that you can borrow through a reverse mortgage is calculated.
The proceeds that you’ll receive from a reverse mortgage will depend on the lender and your payment plan. The amount that you can borrow for an HECM will be based on the youngest borrower’s age, the loan’s interest rate, and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is $970,800 as of Jan. 1, 2022.
The other important factor in the amount that you receive from your reverse mortgage is what payment schedule you choose. You can take the proceeds from your reverse mortgage as a lump sum, as equal monthly payments, as a line of credit, or some combination of these. The equity that you have left in your home will depend on how long you’ve had your reverse mortgage and the payment schedule that you choose.
With all 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 that you receive from your reverse mortgage. However, because your reverse mortgage is based on the value of your house when you take out the mortgage, you’ll have to essentially take out a new reverse mortgage. This is called refinancing.
Refinancing a reverse mortgage can be very costly due to exceptionally high origination fees and other fees. You should consider the cost of refinancing carefully before proceeding, and take advice from a U.S. Department of Housing and Urban Development (HUD) counselor if possible.
Refinancing a Reverse Mortgage
If your house has increased significantly in value 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 it is similar to the process that 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 closed on the original reverse mortgage.
First, check your eligibility for a reverse mortgage. Then, shop around for loans, paying particular attention to interest rates, loan terms, and fees. If you find a deal that is better than the one you have at the moment, you can go through the underwriting process (just as you did for the original loan) and then close on it. At the end of the process, your new reverse mortgage will be used to pay off the old one.
This sounds simple, but the process can be complex, and the costs of refinancing can be difficult to calculate. For this reason, as well as the exceptionally high origination fee and other fees 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 lowered substantially.
However, this hasn’t stopped unscrupulous lenders from encouraging seniors to refinance their mortgages. And in turn, in 2009, the U.S. Department of Housing and Urban Development (HUD) issued a mortgagee letter that established the “five times benefit rule.” This rule ensures that refinancing the reverse mortgage benefits the borrower, and it protects homeowners against loan churning—a practice used by predatory lenders to encourage borrowers to refinance a reverse mortgage when there is no advantage to the borrower.
The five times benefit rule states that the money available to the borrower must equal at least five times the refinancing fees, including closing costs. For example, if fees total $5,000, then the loan refinance 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 rise significantly for a straight refinance to be cost effective in the long term. However, if you are looking to increase the amount of money that you receive from your reverse mortgage, there are some alternatives to refinancing into another reverse mortgage.
These alternatives include:
- Modify your payment terms. Borrowers looking to change how 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 may then allow you to access more of your home equity through a term payment or lump sum.
- A cash-out refinance. If you’re looking to access a large amount of home equity at once, a cash-out refinance can help with that. Doing this will mean that you must make monthly payments to a lender. However, in the long term, you may preserve more of your equity compared to refinancing a reverse mortgage.
- A home equity loan or a home equity line of credit (HELOC). HELOCs provide homeowners access to home equity. On one hand, unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments. On the other hand, they may come with fewer fees and can be a less expensive alternative to refinancing a reverse mortgage.
In other words, you have many options when it comes to adjusting or renegotiating your reverse mortgage, and the best option will depend on your reasons for doing so. Contacting a HUD counselor can be useful if you are still unsure what to do.
Should I refinance a reverse mortgage?
It can make sense to refinance a reverse mortgage if the value of your home has risen significantly. However, refinancing comes with high fees. Whether it makes financial sense to refinance depends on your age, the value of your home, how much equity you have, and your overall financial objectives.
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 get another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage to another one.
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.
The Bottom Line
If the value of your home rises, it might be possible to increase the amount that you receive from your reverse mortgage. However, the high costs of refinancing mean that this 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 needs to be added to the loan, more equity is needed, or the interest rate can be lowered substantially.
If you need to access more of your home equity quickly, there are other options available to you. These include modifying your reverse mortgage payment terms, a cash-out refinance, or taking out a home equity loan or a HELOC.