- Increased principal limit factors (loan to home value percentages)
- Home value appreciation
- Adding a spouse to the loan
- Changing the interest rate terms (adjustable to fixed, fixed to adjustable, monthly to annual)
- At the time of the original loan, the appraised value wasn’t used, due to a lower purchase price or cost of construction requirement
For us to show no further proof of a net tangible benefit, the new principal limit needs to exceed the closing costs by five times. Let’s take a look at an example to illustrate what we mean by this:
Jane Doe took out a reverse mortgage in 2013. Her total loan amount (principal limit) was $150,000. She found out her home has increased in value, so in 2015 she looks to refinance. The new loan amount is $200,000. That’s a $50,000 increase in principal limit.
If the closing costs–whether paid by her or the lender–are $10,000 or less, she is eligible for the refinance with no further proof of a benefit. Her increase in loan amount was 5x or more than the closing costs.
There are many HECM to HECM refinance (reverse mortgage refinance) scenarios where the net tangible benefit must be proven because the above scenario does not apply. Here’s a more common example that we see that is eligible for refinancing:
John Doe took out a reverse mortgage in 2012. His total loan amount (principal limit) was $150,000. He found out that his home has increased in value, so in 2015 he looks to refinance. The new loan amount is $175,000. That’s a $25,000 increase in principal limit. The total closing costs are $6,000, but are paid in full by the lender.
While John’s new loan doesn’t exceed five times the closing costs, it does provide a major benefit to him, mainly because the costs are paid by the lender. When the scenario isn’t as clear as the cases above it can be up to an underwriter’s discretion.
For example, if you are increasing your line of credit by $15,000, but the refinance will cost you $6,000 (not lender paid), an underwriter will likely decline the loan unless there’s an additional benefit.
Other Noteworthy Items
If your previous reverse mortgage balance is very low due to most of the funds remaining in a line of credit, it will be difficult to do a no cost (or low cost) refinance. The only way for lenders to waive origination fees, and contribute to closing costs, is if there is a significant loan balance at the time of closing. That amount will vary from lender to lender.
Your original reverse mortgage must be eighteen months old at the time of application for you to be eligible.
When refinancing a reverse mortgage, you can waive your requirement to complete the counseling session. Your original reverse mortgage loan must have been taken out no more than five years ago. The increase in principal limit must also exceed five times the closing costs (paid by you). There are some states that will not allow you to waive the counseling, so check with us for an up to date list.
You do not have to double pay the upfront mortgage insurance premium. You get credit for what you paid upfront on the previous reverse mortgage. For example, if you paid $4,000 initially and the new charge is $6,000, you will only have to pay the difference of $2,000.
If you are unsure about your eligibility within FHA/HUD requirements, give us a call and we will help you determine the exact requirements for your property. There are a number of factors to consider during this process, and we’ll walk you through these factors and if there is a tangible benefit to doing so.