Refinance A Reverse Mortgage

The decision on whether to refinance a reverse mortgage, like so many financial decisions, depends on individual circumstances and also on four specific factors. All reverse mortgages are based on these same four factors: the amount of equity in the property, current interest rates, any federal limits for the particular neighborhood, and the age of the applicant. In the case of a married couple, the age of the younger spouse is the relevant one. The minimum age is sixty-two years old. Since one of the factors taken into consideration is life expectancy (which is based on actuarial charts and converted to months), the older a person is the better from the standpoint of the financial institution. To refinance a reverse mortgage presupposes the existence of such a loan in the past so obviously the borrowers age has increased and, as cold and calculating as it may seem to say, the persons life expectancy has decreased. This factor, taken by itself, is a positive when considering a refinancing option.

The other three factors, then, must be carefully looked at before the potential applicant makes a decision on refinancing the loan on the home. The first, the amount of equity in the property, should be considered first. This is only logical because if there isnt enough equity to refinance a reverse mortgage, then the other two factors no longer matter. Exploring this factor requires an understanding of how these types of mortgages typically work. Lets say that an older couple own a home appraised at $150,000 and they owe $50,000 on their current mortgage. They have $100,000 worth of equity in their home. Each month, they send a payment to the lending institution. The husband and wife are both sixty-three years old and want to retire, but the home wont be paid off for several more years. The couple like the house and are not crazy about the idea of selling and relocating. Applying for a reverse mortgage may be the answer. Based on the factors listed above, the couple applies and is approved. As part of the typical process, the original home loan is paid off so that the reverse mortgage is in the first lien position. Instead of making monthly payments to the lending institution, the couple receives income. The reverse mortgage will be repaid when the couple sells the house, moves out, or upon the death of the surviving spouse.

Ten years have passed and the couple decides to refinance a reverse mortgage. They are now seventy-three years of age and the life expectancy, obviously, is less than what it was ten years before. The appraised value of the home has increased to $300,000. Because of prudent economic decisions, the amount the couple owes the reverse mortgage lender is $100,000 (which includes the payoff of the original home loan, closing costs, and a small amount used to make upgrades and repairs to the property). Based on just these two factors, age and equity, the couple will have access to a larger amount of money. As before, the money can be accessed three ways. The elderly couple can choose a lump sum, a monthly check, or a line of credit. Or the couple may be able to select a combination of the three that works best for their personal situation. "In the house of the righteous is much treasure: but in the revenues of the wicked is trouble" (Proverbs 15:6). Two more factors also need to be considered before the final decision can be made to refinance a reverse mortgage.

These two final factors are federal limits and interest rates. A great percentage of reverse mortgages are known as FHA HECMs. The acronyms stand for Federal Housing Authority Home Equity Conversion Mortgages. Because this is a government program, the FHA sets certain limits in neighborhoods throughout the country. A property whose value exceeded the limit five or ten years ago may be eligible now. As part of the federal Department of Housing and Urban Development (HUD), other requirements must be met by the applicants. For instance, applicants must attend HUD- approved counseling. Only certain types of housing are eligible, such as single-family, one- to four-unit apartments, etc. More information on eligibility and requirements for those who wish to obtain or refinance a reverse mortgage can be found at the offices and websites of these government agencies.

The final factor is interest rates. The vast majority of these are variable interest rates tied to an index with an additional margin added on. Commonly used indexes are the one-year Treasury bill and the LIBOR index. The margin usually ranges from one to three additional percentage points. So, for example, if the LIBOR is at five percent and the margin is an additional three percent, the variable interest rate would be eight percent. But the rate would go up and down as the LIBOR moves up and down with an adjustment in the rate occurring perhaps every six months. The good news for people who want to refinance a reverse mortgage is that fixed rate products are now available. A fixed rate is preferred because the up and down roller coaster of the variable rate is eliminated.

Of course, there is much more to know and to consider about this topic. An individual should do sufficient research before making a decision to either obtain or refinance a reverse mortgage. For some families, the generated income may be a blessing. Others may find themselves regretting the decision. After all, the closing costs and fees are expensive and a reverse mortgage means that the house cannot be passed on to any heirs. As with all financial decisions, this one requires research, careful consideration, and as complete an understanding as possible of all possible ramifications.

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