Can You Refinance Your Reverse Mortgage Loan

I received a call from the son and daughter of a senior borrower today and they wanted to know if their mother could refinance her reverse mortgage loan. I answered them honestly that yes, she could, but had to ask why was she thinking about refinancing.

The reason I asked for the borrower's motivation was because I had a borrower call just a week before and ask if he could refinance because he was receiving a payment and he wanted to change to a line of credit. I told him that he needed to contact his lender, that with a small fee he could change his existing loan and not have to incur any additional costs for a new loan. The limits had not changed since he had done his initial loan and it did not make any sense for him to look into refinancing.

Back to the first borrower. When I received her information, I saw that she had taken an annual adjustable rate, that the HUD Lending Limit in her area had gone up a good deal, that her initial mortgage was taken with her husband who was five years younger but had since passed and that it really did make sense for her to refinance into a new monthly adjustable reverse mortgage loan. Since the passing of her husband, she really needed the extra income and I was glad we were able to help her out.

The things you have to remember when you consider refinancing a reverse mortgage loan is that HUD has a Five Times Benefit rule to determine whether or not the borrower has to go back through counseling again. The five times benefit means that you have to take all the costs incurred to do the new loan and multiply those by 5 and if the borrower is not receiving at least 5 times or more this much money with the new loan over the old loan, then the borrower must attend counseling again. It doesn't mean the borrower can't get the loan, if it still makes sense, they just have to go through the counseling again to make sure they again understand the program. A good way to illustrate this is that if all the costs for the new loan would total $10,000, then the borrower would have to net $50,000 more on the new loan (there is a formula that the lenders have to follow per HUD guidelines which also accounts for servicing set-asides but for simplicity sake, this is a simplification of the policy). In my borrower's case, she wound up netting a significantly higher benefit and did not have to attend counseling again.

The costs you have to incur are all the same costs as when you got your first reverse mortgage (title, escrow, appraisal, origination fee, etc.) with the exception of one the mortgage insurance. The mortgage insurance from the loan being paid off is transferred to the new loan so only the difference from the old level to the new level is what the borrower has to pay on a refinance. For example, if the old mortgage insurance was based on a lending limit of $200,000 and the new limit was $225,000, then the mortgage insurance would be 2% of the difference between the two, or $500 instead of the $4511.11 it would normally cost. The borrower already paid the other $4,011.11 on the first loan and HUD does not charge it a second time for the new refinance.