Like any other mortgage, there may be a time when it’s optimal to refinance a reverse loan due to a drop in interest rates, increased home value or that the borrower is several years older than when they did their original reverse mortgage.
As of this posting, interest rates have decreased and many reverse loan borrowers are being solicited to refinance their current loan into a new one, however, there are some guidelines that have to be followed and not every borrower will pass them.
There has to be a tangible benefit to the homeowner to refinance their reverse loan and at the same time protect them from being taken advantage of and being charged unnecessary fees.
Regulations are in place to protect seniors from being taken advantage of and this has resulted in 3 “tests” to determine whether or not it would be beneficial for the borrower to refinance their current loan into a new one.
The borrower must pass 2 out of the 3 tests to be considered eligible to refinance their existing mortgage and if they do, they can apply for the new mortgage.
There is a”seasoning’ requirement and this means the loan has been in place for not less than 18 months from the time it was originated, funded and closed. Otherwise, the borrower will have to wait, although there are some exceptions to this, that could be discussed in an additional post.
- Closing Cost Test. The increase in available loan proceeds must exceed five (5) times the total closing costs amount This is the “benefit factor.”
2. Loan Proceeds Test. For any reverse mortgage refinancing the available Benefit Amount from the new HECM is the amount of the Principal Limit available to the borrower MINUS the HECM loan balance being paid off and the Closing Costs for the new mortgage. This must equal or exceed 5% of the HECM Refinance Principal Limit.
3. Rate Reduction Benefit Test. The borrower must recover the total costs of the new loan through savings in the annual interest rate charged on the new loan within 4 years.
Confused? Of course and the only way a borrower can find out if they would qualify for a refinance would be to provide a complete copy of their most recent mortgage statement to a reverse loan professional and have them do the calculations for you.
Over the years I have refinanced many of my former clients, but they all have to pass the tests and most of the time they do. If they wish to refinance into a Jumbo/Proprietary reverse loan, that can be done too, and the qualifying tests are very similar.
When in doubt, call your loan professional and ask them. It might be a benefit to you at this time while the interest rates are so low and you might be entitled to more of your equity and increased cash flow.
The NerdWallet recently discussed how more Financial Advisers are finally getting past their previous aversion to using a reverse loan for retirement planning and extend their client’s retirements fund’s longevity via using a “Standby” Reverse loan.
This change of view in the Retirement Planning community has taken a very, very long time. But more Advisors are now open to using a Reverse loan as part of their client’s retirement planning.
Although there are still some Advisors who remain stuck in a old “mindset” that using one, depletes a clients’ estate. And they refuse to even make an iota of effort to learn about how they can be so beneficial in preserving a retirement portfolio.
I occasionally will still encounter one of those “old dude” Advisors who refuse to get educated about the benefits of a reverse loan for their clients and quite often are rude to me!
In any event, here is a copy of part of the article from NerdWallet.
NerdWallet: ‘Standby’ Reverse mortgage Good for Tapping Home Equity.
Posted by Alana Stramowski On June 22,2016
In the past, the general consensus among financial planners was that a reverse mortgage was a horrible option, but now with reverse mortgages being safer and cheaper than ever, people are changing their viewpoint and being more creative with the ways in which the product can be used, according to a recent article on NerdWallet.
For many people, their investment portfolio is one way they can secure their retirement funds, and protecting it is one of their top priorities. If someone is over 62, a standby reverse mortgage strategy may be one option to help protect their portfolio and help make sure that it lasts throughout retirement.
“Recent research indicated that reverse mortgage lines of credit offer an important safety valve in retirement,” writes personal finance columnist Liz Weston for NerdWallet. “When the stock market plummets, retirees can tap credit lines instead of their portfolios.”
This method also can help give a portfolio some time to recover when the market rises.
There are numerous ways tapping into home equity can benefit anyone getting near, or in retirement. Funding home improvements with home equity is also a way to help keep someone in their home as they age and significantly cut down on how much of their nest egg they would need to tap into, the article explains.
These are the times when borrowing against home equity can be a smart decision, but those who do need to be aware of all of the rates and terms of reverse mortgages before jumping in headfirst.
It’s very gratifying to know that such an esteemed financial resource has published an article that supports the wisdom of using funds from a Reverse loan for retirement planning.
And it’s not just the Kiplinger Newsletter touting the benefits gained from using the FHA HECM loan for retirement options.
More publications such as the Huffington Post, the Wall Street Journal, the Financial Advisor Magazine and others are taking very serious considerations about their use to extend retirement funds.
Here is a copy of a summary of the Kiplinger article that was published a couple of weeks ago. I’m a bit behind on the Reverse loan loan, but here it is.
Kiplinger: Consider Reverse Mortgages in ‘Ramp-Up’ to Retirement
Posted ByJason OlivaOn March 10, 2016
“Reverse mortgages are becoming more synonymous with retirement planning as the mainstream media continues its coverage on how these financial products can help both retirees and pre-retirees.
The latest reportage from Kiplinger’s Personal Finance April 2016 features two stories on reverse mortgages and how they fit into retirement planning discussions.
Earlier this week, RMD guided readers to an article that spotlighted how rule changes over the past few years have enhanced the appeal of reverse mortgages for retirees. As a result of this “makeover,” Kiplinger said reverse mortgages can be a flexible source of retirement income.
In another article published this week, Kiplinger suggested using a reverse mortgage to tap into home equity as one possible “money move” for pre-retirees to ramp-up their retirements.
The article included several tips such as maxing out retirement accounts, creating a retirement budget, adequately preparing for long-term care, plotting a Social Security strategy and, last but not least, tapping into home equity.
Depending on a retiree’s situation or personal preference, Kiplinger suggests downsizing into a lower-cost home to cut housing costs in retirement. For those who would prefer to remain in their current home, a reverse mortgage might be the better solution.
“You may conclude that staying put is a better idea,” writes Jane Bennett Clark for Kiplinger’s Personal Finance, April 2016. “In that case, look into a reverse mortgage.”
“These deals, available to homeowners age 62 or older, give you access to home equity,” Clark adds. “The loan does not have to be repaid until the last surviving borrower dies, sells the house or moves out for at least 12 months.”’
An interesting article and study was published recently by the trade magazine The Journal of Personal Finance that did a comparison between using a tenure payment option from a Reverse mortgage versus receiving a payment from an SPIA.
Here is part VI of the article that I have gradually been posting in this blog.
New Research Shows Financial Planning Value of Tenure Reverse Mortgages
Posted By Jason Oliva On March 3, 2016
“Researchers then move onto how the reverse mortgage options and SPIAs, either separately or together, can be integrated with systematic withdrawals to improve retirement outcomes.
Per the already established scenario featuring the 65- and 63-year-old husband and wife, researchers also assume this couple—who have a $400,000 home with no mortgage—also has $1 million in tax deferred savings.
Additionally, their Social Security income is $30,000, which will increase each year for inflation, and is assumed to reduce to $200,000 in real dollars when either member of the couple dies. It is also assumed that this couple has their savings allocated 60/40 in stocks/bonds and rebalanced to this allocation annually.
Compared to relying only on systematic withdrawals from investment accounts, the use of either reverse mortgage option (LOC or tenure) was found to greatly increase consumption—$70,881 median consumption for the line of credit, compared to $74,735 for tenure payments and $64,287 for systematic withdrawals.”