Don’t Be Fooled about Refinancing

There was a real surprise in the announcement HUD published last month regarding changes it is making to the government insured reverse mortgage, known as HECMs.  While it generally decreased gross proceeds (i.e., the amount borrowers are eligible to receive) for all ages at all expected interest rates, it also unexpectedly increased them for some ages at expected interest rates below approximately 5.4%.  For some, this could be great news but for most….

Don’t be fooled about refinancing from an existing HECM to a new one.

Today an existing HECM borrower called and described his situation.  He needed no additional cash but was enchanted with the idea that he could get more proceeds.  He is seventy years old and lives in a nice home by himself.  He got his loan in 2006.  His home was worth over $700,000 back then; today it is estimated to have a value in the mid $500,000 range.  With higher lending limits and the new changes, he wanted to find out what was available to him.

When the caller heard he could get $70,000 more, he became very interested.  He also liked the idea that there would be no monthly servicing fees like the $25 per month he is paying right now.  Then came the bad news.  First, he would probably have to go to a fixed rate HECM with a 4.99% interest rate rather than the 2.4% he was currently accruing under his adjustable rate HECM.  Second, the FHA Mortgage Insurance that he was accruing monthly on his loan would rise to 1.25% per annum from the 0.5% he was incurring now.  Just the FHA insurance cost alone would increase on his current balance by over $170 per month.  All in all the caller did not like the alternatives but was happy to hear what his choices were.

Yesterday, a woman called asking if I heard that she could get a HECM with a 4.99% stabilized interest rate but with more proceeds?  Last year at our suggestion she had taken out an adjustable rate reverse mortgage and was now receiving over $2,500 per month in tenure payments.

Tenure payments provide a specific amount of cash borrowers can receive monthly over the life of the HECM but they generally vary by the age of the youngest borrower, the expected interest rate, and the amount of available proceeds dedicated to the tenure payouts.  They can only be obtained with an adjustable rate HECM.

When the woman discovered that getting the 4.99% fixed interest rate would cause her tenure payments to terminate and she would instead be required to take all of loan proceeds upfront, whether she needed them or not, her tune changed.  Then as it became clear FHA premium costs would go up as well, all of a sudden, she did not want to trade out of her current HECM to a new one, even if she could get a few thousand more.  When asked if the caller had provided the negative aspects of refinancing, she proclaimed loudly:  “No.  They just wanted to send me “my” new loan application….”  She was not happy with the caller.

Some reverse mortgage originators care more about churning new loans than providing needed information.  It is important that you find out the facts.  So if you have questions or want the information you need to determine if a refinance is for you, please click on the “Have a question?” button at the top of your screen.