Written by Britany Luth, as originally published in The Reverse Review.

With all of the recent program changes, the practice of refinancing borrowers with an existing HECM into a new HECM is becoming increasingly common.

Many borrowers, including borrowers who just closed a HECM within the last few years, have advantageous reasons to refinance, which could include:

1. The stabilization or increase of housing prices in their area 2. The introduction of annual, adjustable-rate mortgages with a lower rate cap 3. Increases to PLFs 4. New protections for non-borrowing spouses

The Refinance Benefit Factor The most common reason to refinance is to obtain access to additional funds that are not available through the current HECM loan. In order to determine the benefit to the borrower and to determine if counseling can be waived, FHA and NRMLA have published a refinance benefit factor (“refi factor”) calculation. The refi factor should be five times the cost of the loan or greater. This calculation takes the increase in principal limit divided by the loan closing costs.

For example: A borrower’s existing principal limit is $125,000, and their principal limit for the new HECM would be $140,000. Closing costs are estimated at $5,500. $140,000 – $125,000 = $15,000 $15,000 / $5,500 = a refi factor of 2.72

This borrower’s refi factor is less than five times the cost of the loan. The originator or lender may credit additional closing costs in order to increase the factor (if certain other criteria are met), or the borrower may demonstrate a bona fide advantage for refinancing despite the lower benefit.

Accrual Rates and ClosinCost Credits In some cases, crediting back some of the borrower’s closing costs can increase the refi factor above the threshold. According to NRMLA guidance in Ethics Opinion 2010-1, if the borrower’s accrual rate (interest rate plus the ongoing mortgage insurance premium rate) is remaining the same or decreasing, the refi factor can be based on the closing costs minus any credits. However, if the borrower’s accrual rate is increasing, the closing cost credit will not be included in the calculation.

Bona Fide Advantages There are numerous potential advantages for a borrower to consider refinancing, among them: -Adding a spouse or family member who resides in the property to the loan -Refinancing to add protections for an eligible non-borrowing spouse who resides in the property -Obtaining access to funds needed for a financial emergency -Lowering an interest rate or interest-rate cap combined with other benefits, such as additional loan proceeds

The loan originator should clearly explain that the borrower must understand and consider all factors that are part of the refinance. For example, if the borrower is refinancing to get a lower interest rate or interest-rate cap, they should consider whether the amount of closing costs they will pay in order to get the lower rate will offset any benefit of the lower rate over the long term.

Waiving Counseling Some borrowers who have a prior HECM and were counseled by an FHA-approved counselor have the option to waive the session. However, there are FHA and state requirements surrounding the ability to waive counseling.

FHA requires that:

  • The borrower signs the Anti-Churning Disclosure.
  • The borrower’s current HECM loan was closed within five years of the new HECM loan.
  • The borrower’s benefit for refinancing into a new loan is at least five times the cost of the refinance.

If all of these criteria are met, additional state requirements must be considered. Certain states require that the borrower receive counseling, regardless of whether FHA terms allow them to waive the session. Check with your compliance department to ensure the states you do business in allow borrowers who are refinancing to forgo counseling.

Additionally, if the borrower does meet the FHA and state requirements at origination, they must make sure the requirements still hold up at closing. Commonly, the borrower will meet the five times benefit ratio at application, but at the time of closing (due to changes in appraised value, fees, etc.), the benefit has dropped below five times. In that case, any fees for services provided prior to closing may have to be reimbursed or credited back to the borrower.

Things to Remember Whether it’s the borrower’s first HECM or they are refinancing an existing HECM, the reasons for refinancing and the benefit to the borrower should be carefully considered. The originator should describe all of the available products to the borrower and help them choose a product that will best meet their needs. The originator should also clearly describe all of the benefits and any factors that will offset those benefits to the borrower. It is important to note that all borrowers, even borrowers refinancing an existing HECM, will be subject to the new Financial Assessment rules if their case number was assigned on or after April 27, 2015.