Refinancing a Reverse Mortgage

Why Homeowners Look at Refinancing

The situations below are the ones that commonly bring homeowners to this question. They are descriptions, not suggestions.

The home is worth more. How much a HECM makes available depends partly on the home's value. HUD lists the factors as including the age of the youngest borrower or eligible non-borrowing spouse and the lesser of the appraised value, the HECM FHA mortgage limit or the sales price, per its HECM program page. A higher value can mean more equity reachable under a new loan, though costs and the growing balance weigh against it.

The interest rate structure. Federal law allows a HECM to carry a fixed or a variable interest rate, as agreed between borrower and lender. A homeowner may want to move from one kind to the other.

A spouse was left off. A spouse who is not a co-borrower may still count as an "Eligible Non-Borrowing Spouse," a HUD term for a spouse who qualifies to stay in the home after the borrower dies. Some couples look at a new loan to bring that spouse fully onto it.

Circumstances changed. A homeowner whose income has grown, or who wants to stop the balance from growing, may look at a traditional mortgage instead.

The Two Paths: Reverse-to-Reverse and Reverse-to-Forward

Each path works differently, and the difference shapes everything that follows.

Reverse-to-reverse (HECM-to-HECM). The new HECM pays off the old balance, and any extra room under the new loan becomes available under its terms. The borrower goes through eligibility again: age, principal residence, the property and counseling, discussed in the next section. The new loan carries the same basic bargain and obligations as the old one, described in the first section and in "What Stays the Same" below.

Reverse-to-forward. A traditional mortgage or home equity loan pays off the reverse mortgage. From then on, the homeowner makes monthly payments, and each payment reduces what is owed, so equity can rebuild over time instead of shrinking. To get there, the homeowner must qualify for the new loan under that lender's own underwriting standards, which typically include a review of income and credit. Monthly payments must also fit a budget that may be fixed.

Neither path is better in general. One trades a growing balance for no monthly payment; the other trades a monthly payment for a shrinking balance.

A cash-out refinance of a traditional mortgage is a related but separate idea, explained in reverse mortgage vs cash-out refinance.

Federal Requirements for a HECM-to-HECM Refinance

For a homeowner, the federal rules come down to two protections: the lender must show plainly what the new loan costs and what it adds, and counseling is generally required again.

The HECM is the only reverse mortgage insured by the federal government, offered through lenders approved by the Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), as HUD's HECM program page states. The program rests on 12 U.S.C. § 1715z-20, and the regulations in 24 C.F.R. Part 206 carry it out. Under 24 C.F.R. § 206.53, HUD's general HECM requirements apply to a refinanced HECM unless that section provides otherwise, and the refinance authority applies only when the same property stays as collateral.

The anti-churning disclosure. "Churning" means refinancing a loan again and again to generate fees. To guard against it, the statute requires the lender to give the borrower a good faith estimate of:

"(A) the total cost of the refinancing; and (B) the increase in the mortgagor's principal limit as measured by the estimated initial principal limit on the mortgage to be insured under this subsection less the current principal limit on the home equity conversion mortgage that is being refinanced"

The principal limit is the maximum amount the borrower can access. HUD's Form HUD-92901 puts those two numbers side by side, so a family can see whether the new room outweighs the cost.

Counseling. Counseling from an independent, HUD-approved counselor is required for a HECM, and generally for a refinance too. The borrower and any non-borrowing spouse may waive it only if all three conditions in 12 U.S.C. § 1715z-20(k)(3) are met: they received the anti-churning disclosure; the increase in the principal limit exceeds the total cost of refinancing by an amount HUD sets; and no more than five years have passed between closing the original HECM and applying to refinance. Under 24 C.F.R. § 206.53, the five years run from the original HECM even if an earlier refinance was more recent.

Age and residence. Under 24 C.F.R. § 206.33, the youngest borrower must be 62 or older at closing, and under 24 C.F.R. § 206.39 the home must be each borrower's principal residence at closing. More detail is in reverse mortgage age requirements.

Fees. Federal rules limit the origination fee, the lender's charge for making the loan; it may be fully financed into the loan, and the lender discloses it.

Costs That Come Out of Your Equity

A new loan is not free, even when no cash changes hands at closing. The costs usually come out of the home's equity.

Closing costs. Either path brings closing costs much like the original loan's. The categories typically include an origination fee, an appraisal, title charges and recording fees. For a HECM there is also mortgage insurance, the FHA coverage that protects the program. Under 24 C.F.R. § 206.53, the "total cost of the refinancing" means the allowable charges and fees plus the initial mortgage insurance premium.

Mortgage insurance. A HECM has an upfront premium and an ongoing annual premium. HUD's Mortgagee Letter 2017-12, effective for HECMs with FHA case numbers assigned on or after October 2, 2017, set the initial rate at 2 percent of the maximum claim amount and the annual rate at 0.5 percent of the outstanding balance. For a refinance, 24 C.F.R. § 206.53 caps the new initial premium at three percent of the increase in the maximum claim amount, minus the initial premium already paid on the old HECM. That cap is a ceiling, not the amount charged. The CFPB's cost overview notes that a reverse mortgage is typically more expensive than other home loans.

The growing balance. With a new HECM, interest and charges are added to a balance that now includes the old loan plus the new closing costs. It keeps growing from there.

How long the family plans to stay. One question families often work through: if the homeowner expects to move or sell in a few years, does the added access outweigh what the refinance costs? The two numbers on the anti-churning disclosure are the starting point. More about cost categories is in reverse mortgage costs and fees.

What Stays the Same After Refinancing a Reverse Mortgage

A new reverse mortgage changes the numbers, not the obligations. For families worried about surprises, this may be the part that matters most.

When a HECM replaces a HECM, every obligation described at the start of this article carries over unchanged: the residence, tax, insurance and upkeep duties, the growing balance, and the general rule on when the loan comes due.

Federal regulations spell out when a HECM becomes due. Under 24 C.F.R. § 206.27, the balance is due in full if a borrower dies and the home is not the principal residence of at least one surviving borrower, with a deferral period for an Eligible Non-Borrowing Spouse while its requirements are met, or if a borrower conveys all title and no other borrower keeps title. With HUD's approval, the loan can also become due for other reasons, including:

• The home stops being a principal residence. This applies for reasons other than death, when no other borrower lives there.
• A long absence for illness. This means more than 12 consecutive months away because of physical or mental illness, when no other borrower lives there.
• Unpaid property charges. This applies when the borrower does not provide for property charges such as taxes and insurance.
• Another broken promise. This applies when any other obligation under the mortgage is not performed.

The right to cancel also carries over in a general way: with most reverse mortgages, the CFPB says, a borrower has three business days after closing to cancel for any reason without penalty.

Alternatives to Refinancing a Reverse Mortgage

A new loan is only one answer to "this loan no longer fits." Several others exist.

Keeping the loan as it is. If little has changed, the costs of a new loan may outweigh what it adds.

Changing the payment plan. A HECM pays out under one of several methods: a line of credit; monthly payments over a set term; a set term combined with a line of credit; monthly payments for as long as the borrower lives in the home; that tenure option combined with a line of credit; or another basis HUD approves. Under 12 U.S.C. § 1715z-20(d)(10), the borrower may generally switch methods during the loan, though HUD may limit this for a fixed-rate loan. A conversation with the loan servicer, the company that manages the loan, can show what is possible without refinancing.

Selling the home. At sale, the reverse mortgage balance is paid from the proceeds, and any remaining equity goes to the homeowner.

Downsizing. Moving to a less expensive home can free up equity and lower ongoing costs.

A home equity loan or line of credit. These require monthly payments and qualifying under the lender's standards.

Help with bills. The CFPB notes that state and local programs can help with utilities, fuel and home repairs, and that localities may have property tax help through the county or town tax office. A HUD-approved counselor must also discuss options beyond a HECM. Help from family is another path some households consider.

What Heirs Face When a Refinanced Loan Comes Due

When a parent with a reverse mortgage dies, the questions arrive quickly, often during grief. Refinancing does not change how the loan ends.

When the last borrower dies, the loan becomes due and payable, subject to the deferral for an Eligible Non-Borrowing Spouse described above. The FTC explains that the borrower, spouse, co-borrower or estate generally repays the loan when the borrower dies, sells or moves out.

Heirs typically have a few broad choices:

• Pay off the balance and keep the home. This can be done with savings or a new loan.
• Sell the home. The sale pays the balance, and any remaining equity stays with the estate or heirs.
• Let the lender take the home. This may happen when the balance is more than the home is worth.

A HECM is non-recourse, meaning the lender cannot collect more than the home is worth. Under 12 U.S.C. § 1715z-20(d)(7), the homeowner is not liable for a shortfall between the debt and what the lender recovers from the net sale proceeds or FHA insurance benefits. The FTC's guide puts it plainly: the borrower or the estate cannot owe more than the home's value when the loan becomes due and the home is sold.

An heir who wants to keep the house and replace the reverse mortgage with a traditional mortgage in their own name must qualify for that loan under standard underwriting. Repayment timelines come from HUD and the CFPB; the CFPB's repayment page covers them.