There’s no denying the COVID-19 pandemic has shifted the entire world off its normal axis. What used to be everyday things we took for granted like international travel, dining in restaurants without having to be seated six feet away from the next table, or even working at your office, have all but been eliminated, leaving many of us feeling at worst, isolated, and at best, out of sorts.
But there is some good news resulting directly from the pandemic and that comes in the form of financial assistance, including stimulus payments, a booming crypto currency market, record gold prices, and a sharp decrease in mortgage interest rates. Honing in the subject of interest rates, many home owners are not only finding themselves in the fortunate position of refinancing their traditional mortgage, some older folks are considering refinancing their reverse mortgage loan.
But should you refinance your reverse mortgage loan during the pandemic? According to some experts, prior to making the decision to refinance an existing reverse mortgage, it’s imperative that you have a decent grasp of your home’s equity, the current interest rate environment, and also, your overall financial situation.
With the pandemic still raging, many people find that their normal cash flow has been decreased. But even taking a reduced income into account, refinancing might not be the best option. In other words, before you sign of the old dotted line, do your research and then determine the risk factors and costs associated with such a big financial move.
How Refinancing a Reverse Mortgage Works
Although the process is said to vary from lender to lender, here’s what to expect in general. You can complete your reverse mortgage refinancing application online in many circumstances, or you can visit your lender in person. But keep in mind, during the pandemic, some lenders might prefer that you utilize the online tool.
You will then need to speak with an FHA-approved reverse mortgage counselor, in the same manner that you did when you applied for your original reverse mortgage. Once that’s done, you need to find a lender. This can be the same lender who approved your first loan or another outfit. Then, it’s a matter of filling out the application, totaling up your assets, and searching for the best rate available.
Says Finder.com, you should engage in an appraisal of your home. An up-to-date appraisal will give you and your lender a fresh, realistic perspective on your home’s overall value. Once this is done, you can sign your “term sheet.” With both your appraisal and the necessary paperwork completed, your loan can be closed. Then you simply wait for the fun part of the process—the disbursement of your funds.
When to Refinance Your Reverse Mortgage Loan
According to the National Reverse Mortgage Lender’s Association, you need to meet these basic requirements prior to applying for your reverse mortgage refinancing loan. It must be at least 18 months since you closed on your original reverse mortgage. Or, said another way, eligibility for refinancing an existing reverse mortgage loan only happens after an 18 month period has elapsed.
During normal times or during the pandemic, you must nevertheless also pass what’s called a “closing cost test.” In order to pass the test, the principal amount of your reverse mortgage has to be equal to or at least five times the closing costs of the new loan. For example, if your closing costs are $1,500, your refinanced reverse mortgage loan has got to be $7,500 more than your original reverse mortgage.
Another way to look at passing this test, is that your loan proceeds have got to be equal to or more than 5% of the loan amount being refinanced. This is what’s known in the industry as the “five-five rule.” Both standards have to be met in order to be eligible for a reverse mortgage refinancing loan.
The Benefits of a Refinancing Your Reverse Mortgage Loan
One of the major benefits of refinancing your loan is the potential savings you’ll enjoy from lower interest rates. Also, if your home’s value has increased since you got your original reverse mortgage loan, you can tap into even more equity and that means more cash in your pocket which can be sorely needed during the pandemic.
If you are able to add your spouse to the loan, you will both enjoy added financial protection during these uncertain fiscal times. Should one of you die due to COVID-19 or any other disease or accident, the surviving spouse will be able to continue on living in the family home.
You can also give the home to a surviving heir. If the reverse mortgage refinancing originator or originators die, the heirs have full rights to assume the new mortgage and at the same time, keep the property. If your present financial situation warrants it, you might decide to refinance an existing reverse mortgage simply to guarantee that your heirs will inherit the family home.
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