Refinancing Reverse Mortgage

Many reverse mortgage product users have enquired about refinancing of their mortgage. It is important to understand what exactly it means and in which conditions a borrower should avail it.

Reverse mortgage depends upon key factors such as – borrowers age, interest rates, home prices (limits set by federal laws) and borrowers equity in the home. These parameters keep changing as time passes and in many cases for the benefit of the borrower.

‚Äč

In a situation when:

  1. Interest rates are low
  2. House price has appreciated
  3. Borrowers age has increased

then borrower may get a better deal out of refinancing his reverse mortgage. He can pay off the past mortgage amount pending by refinancing his loan and still make profit (higher monthly payout or larger lump sum amount) out of it.
Remember, refinancing is not always profitable, the above three parameters have to be favorable (of course age factor always is, as borrowers age always keeps increasing). . It is to be kept in mind borrower's equity in home is always decreasing so it's a factor against reverse mortgage refinancing as time passes. Other important aspect to be kept in mind is cost associated with new reverse mortgage, they also have to be considered while refinancing. Those costs can sometimes make lot of difference in deciding how beneficial your refinancing exercise will be.

A simple example of refinancing is provided below:

Year 2000, a couple aged 63 (both) avail HECM – a reverse mortgage product to pay off their mortgage of USD 25,000 on their whose appraised value is USD 100,000 at that time. When they take the reverse mortgage, the original loan is paid off and they start get monthly payments.

In 2011, the couple's house value appreciated to USD 250,000 while the loan they have to pay to the reverse mortgage lender is USD 90,000. Based on the two factors – higher age and also higher value of their house, they can get access to larger value out of their reverse mortgage.

Of course, other two factors also have to be considered. The property should be within limits set for the neighborhood by FHA. If this is fine too, final factor of interest rates have to be considered. Interest rates also determine how much you can get by your reverse mortgage product. Majority of these are variable interest rates tied to an index with an additional margin added to it, e.g. LIBOR, one year treasury bill, etc. are commonly used indices.

If the interest rate factor is also favorable (low interest rates are prevailing) then the couple should go ahead and enquire in more detail about the refinancing options including exact payouts along with costs.