The HECM loan is a Reverse Mortgage. Older homeowners take out these loans to use their home equity while they are still alive. Like a traditional mortgage, you can refinance an HECM, but the process is a little different.
Reasons to Refinance an HECM
You may wonder why a homeowner would want to refinance an HECM. They do so for the following reasons:
- Adding someone to the loan, such as a new spouse
- Increased property values that give you access to more equity
- Change the loan’s term (adjustable rate to fixed rate)
- Interest rates fell
Your HECM Refinance Must Make Sense
Loan originators are responsible for making sure the refinance makes sense. They must administer the following tests:
- Seasoning –The homeowner must have had the current HECM for 18 months. If the borrower has not had the loan for 18 months, it doesn’t qualify.
- 5:1 Closing Cost Test – The principal amount of the loan must increase at least five times that of the closing costs for the new loan. The principal increase is the difference between the new loan amount and the existing loan amount.
- 5% Loan Proceeds Test – This tests how much money is left after paying off the original HECM loan and the closing costs. The increase must be at least 5%.
Lenders should not refinance an HECM just to change the loan’s term. It must meet one of the above benefits in order to qualify. While changing from an ARM to a fixed rate is a benefit, it’s not one that constitutes refinancing the HECM.
The largest concern when refinancing an HECM is the closing costs. If it will cost you too much to refinance, it eats away at your profits. Since HECM loans are for older people, it’s like taking advantage of them. That’s why the strict rules are in place. Before you take out an HECM make sure it makes sense and that it’s a loan that you’ll appreciate for many years.Click to See the Latest Mortgage Rates»