about reverse loans
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.
In my previous post, I discussed the negative image of the Reverse loan and where it came from and how we in the industry, are still plagued by this perception that is no longer true.
In spite of the amount of television ads and the many qualified resources for accurate information about the FHA loan program, there are still many people that continue to believe that they are a terrible option for a senior to use to access their equity.
And I have to wonder how many seniors chose not to take advantage of the HECM program when it would clearly benefit them, due to their fear and lack of credible information.
I do not work for a BIG Lender, I am employed by a Broker and I work independently from my home office and I always, always meet potential clients personally in-their-homes.
I do not advertise and neither does my Broker and I conduct my business 100% referral based. From former clients, Bankers, Trust and Elder Law attorneys and Financial Advisors. I have built relationships with them over the course of many years and they know that they can trust me to take excellent care of their clients.
That is how I transform mistrust and lack of credibility. And most importantly, I do not pester them to apply for the loan. It takes time to make a decision and it has to be the best one for the client. Not me.
However, an excellent resource for information that is accurate and correct is to chose one of the HUD Counseling agencies and request a telephone appointment for Reverse loan counseling. They generally charge between $125 to $150 for an hour session, but it’s worth it and will give a person a better grasp of the loan and how it may or may not benefit them.
Here is a link to HUD for a list of approved counseling agencies.
So “whatever you have heard”, don’t believe your neighbor, friend, hairdresser, financial advisor or anyone that is not qualified or knowledgeable about Reverse mortgages.
Because they simply do not know anything.
Only “what they have heard”.