What this article is all about:
Understanding the Cost of a Reverse Mortgage
For many homeowners considering loan options, cost is a very important factor. Understandably, borrowers want the most cost-efficient loan option with the most benefits. In addition, they want to understand how loan fees will be calculated in order to get an idea of how much they should budget.
The reverse mortgage is one loan product gaining popularity with senior homeowners who are concerned with costs. A reverse mortgage is a special type of loan designed particularly for homeowners 62 years of age or older who wish to tap into some of their home equity tax-free. Borrowers may receive funds in a lump sum, a monthly disbursement, or a line of credit.
This loan has the unique benefit of not requiring a monthly mortgage payment to be made while keeping the home’s title and retaining ownership.
While a reverse mortgage has some ongoing payment obligations for the borrower – principally paying real estate taxes, homeowner insurance premiums, and the costs of maintaining the home – there are also certain expenses associated with the loan itself. The costs for a reverse mortgage fall into three categories: upfront, out-of-pocket expenses; closing costs that may be rolled into the loan; and fees due at the maturity of the loan.
So what exactly are these costs associated with securing and terminating a reverse mortgage?
Upfront, Out-of-Pocket Expenses
Upfront, out-of-pocket expenses are often a major concern for borrowers. As opposed to costs that can be rolled into the loan, upfront expenses require a borrower to have cash readily available to pay for these fees. Fortunately, there are relatively few upfront, out-of-pocket costs for which to prepare when seeking a reverse mortgage.
One upfront expense is the cost of reverse mortgage counseling. A reverse mortgage loan is insured by the U.S. Department of Housing and Urban Development (HUD). It is important to HUD that borrowers understand all their other loan options before deciding on a reverse mortgage, so a counseling session with a HUD-approved counselor is required.
The typical price charged by a HUD-approved reverse mortgage counselor is around $125, but you may find a lower or higher fee depending on the counselor. You can access the list of nearby HUD-approved counselors by calling 800-569-4287 or visiting the HUD website.
With this list, you may call each counselor to ask for their price and compare for the lowest cost. Although the counseling fee is required to be paid up front, you may still ask your counselor if they will allow you to roll your counseling fee into your loan, should you decide to move forward with a reverse mortgage.
The appraisal fee is a common expense on all mortgage loans. For a reverse mortgage loan, an appraisal on your home is essential in order to determine the current market value, which is one factor in calculating the reverse mortgage amount for which you may qualify.
The appraisal fee typically ranges between $350 and $550 and will vary depending on your home’s type, its regional location, and its value. This fee may also vary based on the individual appraiser, who must be HUD-approved. The appraisal fee can be significantly higher than this range if your property is in a remote location requiring travel by the appraiser. However, you cannot compare prices for an appraiser like you can with a reverse mortgage counselor. Your appraiser typically will be chosen by an outside appraisal management company, who will select an appraiser near you. Neither you nor your lender may choose who conducts the appraisal on your home.
In addition to determining the market value of your home, the appraisal is needed to determine if repairs will be needed on your home, and consequently, whether some of the funds you may qualify for will have to be set aside to cover these necessary repairs.
Possible repair costs
More often than not, home repairs will not be required to obtain a reverse mortgage. However, in some cases, an appraiser will find that a home needs repairs due to safety hazard issues. These particular types of repairs are required to be completed prior to loan closing. Repairs that are not due to a safety hazard, and are maintenance-related, can usually be rolled into the loan and would not need to be paid for out-of-pocket.
Closing Costs Rolled into the Loan
One of the most attractive benefits of a reverse mortgage is that many costs can be financed into the loan amount, saving the borrower from worrying about coming up with cash for out-of-pocket expenses. For many borrowers concerned with cost, this comes as a big help. The following costs may be rolled into your reverse mortgage loan.
Mortgage Insurance Premium (MIP) the first year
The U.S. Department of Housing and Urban Development insures the reverse mortgage loan. A mortgage insurance premium, also known as the MIP, is the fee that pays for this protection.
This government insurance covers you in three important scenarios:
1) If your lender ever goes out of business, you are federally protected and guaranteed to still receive all the funds you signed up for.
2) If your home’s value ever dips below your reverse mortgage balance, you will still never owe more than the value of your home when sold.
3) As a non-recourse loan, your home is the only collateral that can be used to pay back the loan. In the event of a foreclosure, you are covered against the lender asking for any of your other assets to pay back the loan.
The initial MIP amount is determined according to how much money you withdraw during the first year. If you borrow 60 percent or less of your available funds the first year, your MIP will be 0.50 percent of your home’s appraised value. If you borrow more than 60 percent of your available funds, the first year MIP will be 2.50 percent.
Loan origination fee
The loan origination fee covers the expenses for the lender to operate. For the safety of borrowers, this fee is strictly regulated by the FHA and follows a pre-set formula. The highest a loan origination fee can be is 2 percent for the first $200,000 value of the home plus 1 percent for the remaining appraised value. This fee starts at a minimum of $2,500, regardless of the home value, and is capped at $6,000, which is the highest a loan origination fee could legally be for an insured reverse mortgage. Fees may be lower than this maximum, and in some cases, you may be able to negotiate with your lender to reduce their fees.
Lender servicing fee
For administering the loan, a lender can receive what is called the lender servicing fee. This fee is earned by monitoring taxes and insurance, and providing other services related to the loan to the entity that owns it, including services associated with the loan becoming due and payable. These fees are either calculated into the loan’s interest or calculated as a fixed monthly amount that is set aside from a borrower’s loan proceeds. The FHA again protects borrowers by capping this fee at $35 a month. However, many lenders do not charge a servicing fee. To save on costs, you may choose a lender who will not charge you a servicing fee.
Typical mortgage closing costs
A reverse mortgage will also require closing costs typical of any mortgage loan. These closing costs may include:
Documentation Preparation Fees
Credit Report Fee
Pest Inspection Fees
Flood Certification Fee
You may ask your lender for a Good Faith Estimate outlining all costs of your reverse mortgage to get a clear understanding what you must budget for.
Fees Due at Loan Maturity
Borrowers who are used to conventional loans where a monthly mortgage payment is necessary may be pleasantly surprised by the unique structure of a reverse mortgage loan. With a reverse mortgage, a borrower pays no monthly mortgage payment and instead receives a portion of their equity in the form of tax-free cash. In addition, the borrower may continue living in the home and retain ownership. So, at what point would a borrower pay back the loan?
The reverse mortgage loan is due and payable under a few circumstances. These include if the borrower moves out of the home, passes away, or fails to pay their taxes and insurance according to loan terms. If any of these situations occur, the loan reaches the end of its life, and the following fees become due.
At loan maturity, interest on a reverse mortgage becomes due on any proceeds you received during the course of the loan. For borrowers who chose to receive a line of credit, interest will be charged only on the portion of the line of credit that had been withdrawn and not on the entire line of credit.
Because the borrower is not required to make monthly payments on the loan, interest will accrue at a compounded rate through the life of the loan until it is repaid at the end of the loan. Interest is determined by whether your rates are variable or fixed, with the variable rate tied to an index plus a margin.
Mortgage Insurance Premium (MIP) accrued
Slightly different from the 1st year MIP is the accrued MIP. The accrued MIP is the Mortgage Insurance Premium that accrues on a monthly basis, although it is not due on a monthly basis. This premium is calculated at 1.25 percent of the unpaid principal balance. When the loan ends, this accrued cost is a part of what becomes due.
Loan repayment & other fees
When the loan reaches the end of its life and becomes due and payable, the home is usually the collateral that is used to pay back the loan. The home is sold and the proceeds are used to pay back the reverse mortgage loan first. Any remaining proceeds are then given to the prior owner, typically the borrower or their heirs.
In the event a borrower fails to comply with loan terms, such as continuing to pay taxes and insurance, the loan will become due and payable and the home may be foreclosed. If this occurs, costs will include but are not limited to legal recording fees and inspection fees. However, if borrowers comply with all loan terms and do not default, foreclosure fees should not be a normal reverse mortgage cost.
If you are considering a reverse mortgage, you should carefully evaluate the related expenses. The ability to roll many of the fees into the loan – thereby minimizing your upfront, out-of-pocket expenses – may make a reverse mortgage the right loan for you. To learn more about reverse mortgages and get answers to frequently asked questions, check out this guide from American Advisors Group.