Loan Modification

Refinance your reverse mortgage?

By Gina Pogol

There are two scenarios in which it might make sense to refinance with a new Home Equity Conversion Mortgage (HECM). You might be able to refinance to a lower interest rate and save money. You might be able take a larger payout by refinancing.

The new payoff would be determined by the increase in your property value, the balance on your current loan, your age, and current interest rates. Let’s look at these factors one at a time.

Property value increase: a $250,000 home could be borrowed against by a 65-year old to the tune of $150,000 at today’s fixed rates. If the property appreciates at 5% per year, in five years it would be worth $319,070. All other things being equal, you’d be able to take $192,285 out (less the amounts already advanced and interest accrued). But wait, there’s more.

Your age increases: Sometimes getting older is not a bad thing. A $319,070 home with a 70-year-old borrower releases $201,538.

Current interest rates: Chances are very good that interest rates on HECMs today are substantially lower than what you are paying, especially if your current loan has a fixed rate. The lower the rate, the more cash you get. The other consideration is fixed versus adjustable — fixed rates come with higher payouts. If your current loan is adjustable and you choose a new fixed rate for your HECM refinance, you could make your loans less risky and increase your payout.

Competition: Many reverse lenders today waive origination fees, servicing fees, and more. So you may be better positioned to get a better deal. Just remember to shop with several lenders and compare their Total Annual Loan Cost (TALC) disclosures.

What about upfront mortgage insurance premiums? There is good news on that front. When you refinance your HECM, you only pay insurance on the added value since your current HECM was funded. In out example, that would be the difference between the $319,070 and the original $250,000, or $69,070. The extra insurance is 2% of that or $1,381.

Warning! You won’t be eligible to refinance your HECM if you have not been taking care of your property taxes and home maintenance.

Do you need to get counseling again? It isn’t a bad idea to have someone with no ax to grind analyze the new loan’s costs and its benefits. however, you are not required to get counseling as long as the following are ALL true:

1) You have received the required HUD Anti-Churning Disclosure form with correct
information.
2) The increase in credit is at least five times the cost of the refinance.
3) The time between the closing on the original HECM that is to be refinanced and the
Application for refinancing does not exceed five (5) years.

You’ll probably need to opt out of counseling in writing. I don;t recommend skipping it — do you really expect to remember all that stuff for years?

Finally, the National Reverse Mortgage Lenders Association prohibits its members from “churning” or refinancing reverse mortgages when there is not a bona fide benefit to the borrower. However, your idea of “beneficial” and a lender’s may be different. Counseling can help you make that determination.

Full post as published by FHA Mortgage Guide on November 01, 2010 (boomark / email).