The answer is obviously yes. If it were no, this would be a very short article.
What do I mean by “refinance a Home Equity Conversion Mortgage (HECM)”?
This is where you pay off an existing HECM with a new HECM loan. But why would someone want to do this? There are several reasons:
- Property values may have increased from normal appreciation or renovations. Refinancing the HECM allows you to access additional equity in the home.
- You might want to change the loan terms – adjustable rate to fixed rate or visa-versa.
- Lower rate or ongoing MIP charges.
Side Note – Prior to October 2017, the ongoing mortgage insurance premiums (MIP) were 1.25% of the loan balance. However, after October 1, 2017, it was reduced to 0.50%. Refinancing a loan that originated before October 2017 would save 0.75% without even reducing the margin on the interest rate.
- You may wish to add your spouse to the loan. If you took the loan out before your spouse was 62 years old, or have married since you had the HECM, adding him/her to the loan would provide them additional protections.
If you have had your HECM loan for more than a dozen years, (prior to 2008), the value used in the calculation to determine the loan amount may have been capped by county lending limits. In 2008 The Housing and Economic Recovery Act (HERA) established a national lending limit. This limit was just increased for the sixth time in January 2021 to $822,375. For people with higher-valued homes, who have had their HECM since before 2008, refinancing would allow them to tap into much more equity.
If you have had your HECM for more than 12 months and live in Colorado, you have been buried with mail solicitations (and sometimes phone calls) of people trying to talk you into refinancing. This may be a good idea, but it may not.
What are the benefits of refinancing my HECM?
The National Reverse Mortgage Lenders Association (NRMLA) has issued guidance to lenders to discourage “loan flipping” or “churning”. This a when lenders refinance people without clear benefits just so they can earn a commission.
There needs to be a benefit to you to refinance a reverse mortgage. There are two tests that musted be passed to prove refinancing your reverse mortgage is a benefit. The first is called the “Closing Cost Test”.
Simply put, the increase in the amount of money available to you must be at least five times the cost of the transaction. If the costs to refinance are $4,000, you must increase the amount of money available by $20,000.
The other test is the “Loan Proceeds Test”. The benefit from the refinance must be at least 5% of the new loan amount. For example, if your new loan amount is $300,000, the new additional funds available must be at least $15,000.
If you pass these two tests, then there is a benefit to you refinancing your HECM reverse mortgage. Now the question becomes
Should you refinance your HECM?
I personally very rarely solicit anyone to refinance their HECM loan. The reason is that I receive calls from people every week who are inundated with solicitation mail and calls from out of state lenders wanting to refinance them. For some, there is a benefit and they qualify, others do not qualify because they do not have enough equity, and still others, while they qualify and there may be a benefit, there is no reason.
Some of my customers have huge amounts of money in their line of credit, they have the lower MIP, and because they have an adjustable-rate, their interest rate is very low (or will be son when it adjusts). There is no reason for this customer to refinance.
I just received a call from a customer who I did a reverse mortgage for about two years ago. Their ongoing MIP is at 0.50% but their interest rate is over 4%. They have more money than they will ever need in the line of credit and do not need more. The people contacting them were telling them they could lower the MIP (cannot happen because it is as low as possible already), and the interest rate.
I looked up this customer’s information and found that their interest rate will be changing on March 1st. (they are on an annually adjustable rate), and it will be lowering down to about 2.7%. I explained this to them and now they are just ignoring the solicitations.
I also talk with a lot of folks who I know could use additional funds, but they simply do not have enough equity in their home for us to do it for them. The lender must be able to loan you at least enough money to pay off the existing HECM loan and pass the two tests discussed earlier. If you cannot do that because the value of the home is not high enough, we cannot do the refinance for you.
If you think you might benefit from refinancing your existing HECM reverse mortgage, please call me. I will let know if it is possible and then we can discuss if it makes sense for your situation.
