FHA-insured Home Equity Conversion Mortgages (HECMs) are refinanceable. That is when you do a HECM-to-HECM refinance (H2H), there must be a legit benefit in it for you. This makes doing the refinance worthwhile, ensuring that you get the bona fide advantage in reverse mortgage refinancing.
Why Do a HECM-to-HECM Refinance
There are a number of reasons why homeowners would like to refinance their existing mortgages, reverse mortgages being no exception.
- Increasing home values
- Decreasing rates
- Adding a spouse to the mortgage, affording him/her protections as a mortgagor.
- Changing loan type, e.g. ARM to FRM
- Availing of higher county loan limits
- Taking advantage of the initial mortgage insurance premium (IMIP) credit, whereby the refund from the old HECM’s mortgage insurance premium will be applied to the UPMIP of the new HECM.
However, are those reasons enough to do a HECM-to-HECM refinance? Do you need to pass some tests in order for the refinance to make sense?
Bona Fide Advantage
Loan originators are bound by ethical standards when they do HECM-to-HECM refinances, as formulated by the National Reverse Mortgage Lenders Association (NRMLA).
These rules ensure the soundness of the HECM refinance, that it will “provide a bona fide advantage” to the senior homeowners. They are also set in place to prevent anti-churning or loan flipping.
The HECM refinance must occur after 18 months of the closing of the prior HECM loan that is being refinanced. This seasoning requirement further requires either of the following:
That the HECM refinance be made at the request of the current HECM mortgagor (owner of the mortgage) to add his/her non-borrowing spouse or another family member as a mortgagor to the loan. This non-borrowing spouse or family member must be living in the principal residence of the current HECM mortgagor and is qualified to be a mortgagor.
That the HECM refinance pass each of the Closing Cost Test and the Loan Proceeds Test.
5:1 Closing Cost Test
To pass this test, the increase in the principal limit must be fives times or more the total closing cost amount of the new loan. This is called the refinance benefit factor.
The principal limit increase is the difference between the principal limits of your current and new loans. Meanwhile, the total closing cost amount refers to all closing costs and fees associated with the HECM to be shouldered by you.
5% Loan Proceeds Test
This test requires that the available benefit amount must be 5% or more of the HECM refinance principal limit.
The available benefit amount is whatever’s left of the principal limit after the original HECM loan balance and the total closing cost amount have been paid off.
In an example given by the NRMLA, a borrower’s current principal limit is $200,000, the new principal limit is $250,000, and the total closing cost is $5,000.
The limit increase is $50,000 and if divided by $5,000, will yield a refi benefit factor of 10, which meets the closing cost test. Likewise, the HECM refinance meets the 5% loan proceeds test as it generates $45,000 in available funds.
If a HECM-to-HECM refinance is only done to change the loan type, e.g. ARM to FRM, or change the ARM’s terms with respect to maximum payment adjustments, this is not considered a bona fide advantage.
To jumpstart your HECM refinance application, get a HECM Servicer Refi Worksheet from your lender. This document will reflect how much you’ve paid in IMIP, the maximum claim amount, and more.