National Standard Unclear When Handling HECM Refinances

An elderly couple inquires about refinancing their reverse mortgage. Their fees will be around $8,000 while their principal limit would increase by $10,000. But is it a good decision?

RMD set out to see whether there is a standard to guide reverse mortgage loan officers in determining whether it makes sense to refinance a HECM when the senior will only receive a small benefit.

However, after talking to several sources, it remains apparent that there is no clear guidance to determine whether it’s appropriate in all instances for a senior.


According to Washington, D.C. attorney Jim Milano, there is “not a net tangible benefit requirement, per se, under the FHA rule. It’s just that if you meet what they call ‘the Five Times Test,’ you don’t have to go to counseling again.” If a borrower does not pass the Five Times Test, Milano notes that, “It doesn’t mean they can’t do the loan. It just means they have to go back to counseling.”

However, Milano notes that there are at least twelve states with regulations on refinance or mortgage loan transactions that require a “net tangible benefit” to the borrower be met, and HECM refinances are subject to such state laws. In some states, the question of whether the loan is in the best interest of the senior is further complicated by statutory requirements making the broker the fiduciary. As such, loan officers should know the requirements of their states.

Peter Bell, President of NRMLA, points out that each lender has their own policy regarding HECM to HECM refinances. However, he notes that it is “a highly subjective manner and every case is different. At the very least, a loan originator should point out the details… to the prospective borrower and urge them to discuss this with a counselor or other trusted advisors.”

Write to Reva Minkoff

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  • There is a difference in looking at a refinance as an all or nothing proposition and viewing it as one that is scaled from ideal to not advisable at all.

    For instance if the amount of proceeds available after all upfront costs from refinancing is less than the current reverse mortgage provides and the interest rate is not substantially lower, that is a no brainer – don’t do it. Just because a refinance will yield $100,000 more in available proceeds than the current reverse mortgage provides is no reason to obtain a refinance especially if the current reverse mortgage was obtained simply to provide a line of credit which has yet to be significantly tapped. If the note interest rate would rise substantially as a result, refinancing should be cautiously considered.

    An interesting example arose a few years ago. Two neighbors had obtained reverse mortgages about a month apart. They were about the same age, lived in the same development with identical floor plans, and had made similar improvements. Their appraisals were all but identical. Four months later, the lending limit in their area rose about $50,000. The rise in the value of their homes made them eligible for a higher principal limit of about $30,000 (and net of upfront costs, $20,000).

    It was clear one neighbor really needed it due to her desperate financial situation. Everyone from the counselor to FHA agreed that she should get it. We all agreed she should do it, even if the interest rate on the note went up. She deperately needed to get rid of her other debts.

    The second neighbor obtained his existing reverse mortgage to provide funding just in case his grandchildren needed it for college. He had a good pension, a great medical plan in retirement, and Social Security. His lifestyle and costs were modest and he had no need for additional cash beyond his income. He saved monthly and had significant cash in reserve with a modest investment portfolio. Other than upfront costs, he had not used one dime of the proceeds. Although he wanted to refinance, there was no way any of us wanted to pursue it; it simply seemed like a waste of approximately $10,000. The note interest rate would remain the same (there was no fixed rate HECM at that time). He finally relented and decided not to move forward.

    While there are some bright rules to follow, refinancing criteria should also have room for subjective decision making.

  • As long as loving (as opposed to selfish–and we all know the difference) Family members or trusted financial and/or legal advisors are involved in the decision making process, truly the decision should be an individual one.

  • Financial Freedom, once the Pioneer and leader in reverse mortgages ALWAYS analyzed, with the correct form, and was required to do so legally, whether the refinancing of the Reverse was advantageous to the Borrower.

  • Financial Freedom, once the Pioneer and leader in reverse mortgages ALWAYS analyzed, with the correct form, and was required to do so legally, whether the refinancing of the Reverse was advantageous to the Borrower.

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