A HECM, or Home Equity Conversion Mortgage, is the technical term for the federally-insured reverse mortgage. Therefore a HECM to HECM refinance (also known as a H2H Refi), occurs when the borrower is paying off an existing HECM with a new HECM.
These reverse mortgages are a little different from traditional HECMs that pay off existing forward liens. In fact, the National Reverse Mortgage Lenders Association (NRMLA) just issued updated guidelines to prevent “loan flipping” or “churning”, a practice where a loan originator repeatedly refinances an existing HECM borrower with no bona fide advantage to the borrower.
Why would someone refinance their HECM anyway?
The HECMs with Adjustable Rate Mortgages (HECM ARMs) have a built-in disincentive to refinance – the borrower’s net principal limit (how much they can borrow) continues to grow over time. This means that homeowners who have not borrowed all of their available funds have a growing line-of-credit that often makes refinancing unnecessary.
However, there are many reasons why a current reverse mortgage client may want to refinance into a new one. Here are just a few:
- A homeowner who is recently married may want his/her new spouse added to title and be listed on the note. With a H2H Refi, the new spouse would have additional protection that the reverse mortgage offers.
- Property values may have increased, offering the homeowner additional funds.
- A H2H Refi may be needed if the homeowner wishes to change loan programs (Fixed Rate or ARM), or if they wish to reduce their interest rate.
One additional reason for a H2H Refi is that prior to 2008, many homes were capped by FHA county lending limits that reduced the amount of funds available for higher-priced homes. In 2008, the Housing and Economic Recovery Act (HERA) established a higher national lending limit ($417,000), and then it raised again in 2009 ($625,500). For this reason, homeowners with higher-valued homes who obtained their HECMs more than 6 years ago, might find the program even more attractive today.
What is the IMIP Credit?
One nice advantage is that the borrower should get a CREDIT for the amount of Initial Mortgage Insurance Premium (IMIP) they paid on their last transaction. This happens regardless of how long it has been since their previous closing. The following example shows IMIP from a standard HECM applied to a NEW HECM:
Original HECM New HECM
Max Claim Amount $100,000 $120,000
IMIP $2,000 (2%) $3,000 (2.5%)
Adjusted IMIP after credit = $1,000
What are the updated guidelines?
The following are recent guidelines/restrictions that are designed to prevent “loan flipping” or “churning” of reverse mortgages:
- The 18 Month SEASONING REQUIREMENT is easy… the new FHA case number shall be no sooner than 18 months from the date of the prior closing.
Even after 18 months, there must be a “bona fide advantage” to the consumer. This means that the refinance will need to originate from a written request to add a family member to the loan, OR the following 2 tests must be passed:
- The CLOSING COST TEST is a little more complex. The increase in principal limit must be at least 5X the costs of the transaction.
For example, a loan with $5,000 in closing costs must produce an increase in principal limit of at least $25,000.
- THE LOAN PROCEEDS TEST is the newest guideline. The available benefit amount from the refinance must be at least 5% of the borrower’s principal limit.
For example, a borrower with a $200,000 NEW Principal Limit must have at least $10,000 in funds generated by the refinance. These available funds, also known as “Net Principal Limit”, may be drawn at closing, held in a Line-of-Credit, or distributed over time in the form of monthly payments.
How do I proceed with a H2H Refi?
The borrower will need to obtain a “HECM Servicer Refi Worksheet.” This document from their current servicer will show their original Maximum Claim Amount (MCA), how much they paid in Initial Mortgage Insurance (IMIP), and the date of their last transaction. Keep in mind, prior to 2009 there were county lending limits in place. Therefore, their appraised value may have been much higher than their MCA.
For assistance with refinancing an existing HECM reach out to me, and I should be able help or find a qualified reverse mortgage professional that can assist you in your state.