Based on feedback from our readers, it seems few (potential) reverse mortgage borrowers are aware of the possibility of refinancing a reverse mortgage. The idea of refinancing is typically associated with conventional mortgages, and for good reason! Who would ever think to refinance a loan that they don’t have to repay directly? [Note: I'm not implying that a reverse mortgage doesn't need to be repaid, but rather that it is often repaid by the borrower's heirs, after the borrower passes away.]

In many situations, however, it can be extremely beneficial to refinance. The most obvious trigger would be a change in interest rates. Since the balance of a reverse mortgage continues to accumulate interest until it is repaid (as with a conventional mortgage), a lower interest rate would necessarily translate into less interest. For those with fixed rate reverse mortgages, this notion is pretty straightforward.

For those with adjustable-rate mortgages, the math is slightly more complex, and rests on certain assumptions about the direction of short-term variable rates. However, those that took out reverse mortgages many years ago probably were limited to variable-rate products, and might wish to refinance into a fixed-rate loan for peace of mind. As with a conventional mortgage, the savings from lower interest might be offset by fees associated with the refinancing. In the case of reverse mortgages, these can be significant. In other words, unless interest rates drop dramatically (by 2%+), a refinancing probably won’t be economical.

There is another goal of refinancing which is unique to reverse mortgages- increased cash payout. Don’t forget that the initial loan amount was determined largely by factors outside of one’s control: borrower’s age, home value, loan limits, interest rates, etc. In the years since you took a reverse mortgage, you have certainly aged, your house may have appreciated, federally-mandated loan limits may have risen, and/or interest rates may have fallen. All of these trends would entitle you to more cash. This is particularly relevant in the current environment, where home prices are depressed and FHA loan limits are becoming stricter. Refinance five years from now, and there is a good chance that these drawbacks have been alleviated. Not to mention that you are now five years older, which means the lender is actuarially five years closer to being repaid.

The analogy would be to a cash-out refinancing on a conventional mortgage. Again, you must make sure that the increased cash payout more than offsets the fees. One rule of thumb is that the additional cash should exceed fees by two to four times. Consider also that an increased loan size would accrue more interest and possibly erode the value of your remaining equity at an even faster pace.

The latter is an important consideration and could leave your heirs with little if any proceeds after selling your home. It would be even more dire if you were forced to move out, as you could potentially be left with little money to put towards a new home. Thus, even though counseling isn’t usually required with a refinancing, it would probably be beneficial to meet with a professional and be reminded one more time about the potential downsides.