Refinancing a Reverse Mortgage to Increase Emergency Funds

Sep 26, 2021 | Reverse Mortgages

(From an email I received, published with permission)

Two years ago, you tweaked my interest in Reverse Mortgages.  I carried a conventional mortgage into retirement with a $175,000 balance.  I could make retirement work, but I didn’t like the (lack of) robustness of my plan.  Furthermore, my wife has a few health (auto-immune) issues that make life insurance out of the question.  She is currently healthy and active but I wanted to have a store of cash so we could self-insure if necessary.

I am currently 69 and my wife is 66.

I read Wade Pfau’s and Don Graves’ books at your recommendation.  In late 2019 I started pursuing a Reverse Mortgage.  I did secure one in January 2020 and subsequently paid-forward on the mortgage to reduce my loan balance and increase the value of the “line of credit”.  The balance of the loan is/was $178,000 and the “line of credit” $87,000.  This first Reverse Mortgage provided us with a ready source of cash for emergencies or health care. With no required mortgage payment, I was quite satisfied with the existing/former contract.

Eighteen months into my first Reverse Mortgage I started getting inundated with advertisements for Reverse Mortgage Refinancing … as that is the time when you can first refinance a HECM.  I did not know that. Today, I just finished closing on my second Reverse Mortgage.

For HECM’s … there are currently special circumstances due to the rapid appreciation of home prices nationwide. HECM to HECM refinance might make sense for your clients/viewers.  I am fortunate that my appraised property value has increased by 44% from $488k in less than two years. 

I am sure it has increased substantially in other parts of the country as well.  My wife is also two years older (now) which qualifies us for a bigger “Principal Loan Factor… PLF” (54.9%) in our case.  These PLF’s are also a function of, and, benefit by the historically low interest rates right now.

Lenders have a lot of leeway in offering attractive loans.  They can waive the loan origination fees and reduce the loan insurance paid at closing on refi’s by providing “lender credits” to the customer.  My lender “comped” the appraisal and I didn’t have to repeat the Reverse Mortgage counseling as the first loan was done less than five years ago.

The lender only must prove that the loan proceeds to the customer exceed five times the closing expenses.

My new loan maintained the same loan balance while increasing the “line of credit” to exceed the loan balance by $25,000.

This was definitely a “win-win” for my family.  Our “line of credit” has increased by 2.36 times.

In my view … if the “Line of Credit” exceeds the loan balance … the loan simply becomes a tax free account that yields income.  I am not concerned with the account interest rate as my gains exceed the “loan balance” interest liability.

Your viewers with HECM’s could certainly benefit by improving their lumped sum/tenure payments/Line of Credits’ with tax free cash.