After entering a reverse mortgage and now seeing a home value that is higher than when the original reverse mortgage loan was originated, the brother of a reader of the Wall Street Journal is wondering if his sibling can find his way out of the reverse mortgage loan in order to take advantage of the higher value of his home.
“Yes, your brother is able to get out of his reverse mortgage,” writes Journal columnist Glenn Ruffenach in response to the reader. “And the process is relatively straightforward.”
While the initial topic concerned how to exit the loan by repaying the balance, it didn’t take long for the piece – based on academic input – to become focused on the possibility of a reverse mortgage refinance.
Soliciting the input of Ohio State University Professor Dr. Stephanie Moulton, the concept for exiting a reverse mortgage is not dissimilar from the process of exiting a traditional, forward mortgage in that the loan balance needs to be repaid.
“Typically, a reverse mortgage is repaid when the borrower dies, or when the borrower’s surviving spouse dies,” he writes. “If your brother wishes to sell his home now—before the end of the loan’s term—he simply would need to pay off the existing balance on the reverse mortgage. Your brother can check with his lender to get the current balance. That figure is based on how much money has been advanced to your brother (remember: with a reverse mortgage the lender is making periodic payments to the homeowner) plus interest.”
If the home value has increased beyond what it was worth when the reverse mortgage was originated, there’s a possibility that he could owe less than the house is worth, according to input from Dr. Moulton. This means if he elects to sell, he can pocket the difference.
“Of course, if your brother wishes to keep the house, he would need to pay off the balance in some other way,” Ruffenach writes. “And that raises an interesting possibility. Let’s say your brother wants to stay in his home—and wants to tap additional equity because his house has appreciated in value. If that’s the case, he could refinance the existing reverse mortgage into a new reverse mortgage, Dr. Moulton says.”
Based on input from Dr. Moulton, Ruffenach explains that roughly half of new Home Equity Conversion Mortgages (HECMs) sponsored by the Federal Housing Administration (FHA) are HECM-to-HECM refinances, an assertion which conforms to the data recently laid out in FHA’s Annual Report to Congress published last month.
Based on the data present in that report, refinances in FY 2021 make up the largest share of total HECM endorsements going back to at least 2009. Industry analysts and other participants have been vocal recently about the trend of refinance activity bolstering industry volume to an unsustainable degree, considering that the amount of loans able to be refinanced is a finite resource especially when considering the product’s penetration rate into its target market.
Read the column at the Wall Street Journal.