Reverse Mortgage Fees Explained

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Reverse Mortgage Fees Explained

Ideal retirement years should be spent with loved ones, developing interests, and unwinding. Cash flow might be an issue for some, though, since many people are behind on their retirement payments. Reverse mortgages might provide your household budget a little breathing space if you own a property.

Key Takeaways

  • In comparison to conventional mortgages, home equity lines of credit (HELOCs), and home loans, reverse mortgages may have higher costs.
  • Mortgage insurance premiums are necessary for government-insured home equity conversion mortgages (HECMs).
  • Mortgage insurance is not required for proprietary mortgages, however there are no restrictions on the amount of other expenses, such as origination fees.

What Is a Reverse Mortgage?

A reverse mortgage is a financial instrument that may only be obtained by homeowners who are 62 years old or older. A standard mortgage is taking out a loan from a bank to pay for a home and paying it back over time.

In contrast, a reverse mortgage pays you the value of the equity in your property. The premise is the same whether you get the money in a flat amount or in monthly installments: You are being paid for the money you’ve already put into your house. When you sell your house or die away, the debt is then repaid.

Loans with reverse mortgages have many moving components and are complex. They also have additional costs compared to a conventional mortgage. Knowing the costs can help you determine if a reverse mortgage will ultimately be advantageous for you. For your convenience, we’ve split out the key expenses so you know what to anticipate.

All costs mentioned above apply to a home equity conversion mortgage (HECM), which is protected by government insurance and has stricter rules and charge restrictions. Depending on the lender, proprietary reverse mortgage costs may be more expensive than those for HECMs. Depending on the area, single-purpose reverse mortgages are also offered. Although they are often the least expensive solutions, they are not accessible everywhere.

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Mortgage Counseling Session

The U.S. Department of Housing and Urban Development (HUD) mandates participation in mortgage counseling for every reverse mortgage application due to the significant ramifications reverse mortgages have for you and your heirs.

The cost of this counseling session, which is typically approximately $125 but may be more, covers the advantages and disadvantages of a reverse mortgage as they relate to your particular financial circumstances. Counseling makes sure you understand what will happen when you pass away or have to leave the house since there may be repercussions for your heirs or spouses who may live with you but aren’t on the loan.

Origination Fees

Both conventional mortgages and reverse mortgages sometimes include origination costs. They serve as a catch-all phrase for the price of handling your loan. Origination costs represent the money the lender makes by offering your loan. Your lender may charge you 2% of the first $200,000 of the value of your house for HECMs, or $2,500, whichever is more. They may charge 1% of the balance beyond $200,000, but the total amount cannot exceed $6,000.

There are no price limits for proprietary reverse mortgages since they are not covered by government insurance.

Upfront Mortgage Insurance Premium

The upfront mortgage insurance cost is another requirement of a HECM (UFMIP).This fee is assessed at closing and is equivalent to 2% of the overall appraised value of the house, not necessarily the amount of the reverse mortgage. A $600,000 house, for instance, would have a $12,000 UFMIP.

Ongoing Mortgage Insurance Premiums

A 0.5% yearly supplementary mortgage insurance premium (MIP) is charged when the reverse mortgage is granted. Based on the amount borrowed, this 0.5% is applied. This is often a lot less than the upfront cost since most HECMs only let homeowners borrow up to 50% of the equity in their property.

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When the amount of a reverse mortgage exceeds the amount of accessible equity, the UFMIP and the MIP come together to create a fund to make up the difference. Since HECMs are government-insured, lenders are unable to demand that homeowners or heirs make up the difference in this circumstance, and this fund safeguards their interests and saves homeowners from consequences.

Since proprietary reverse mortgages are not permitted to impose UFMIPs or MIPs, borrowers may end up paying less overall.

Interest

Your reverse mortgage will be subject to interest in addition to the UFMIP and the MIP. The interest is deducted from the home’s equity since the lender pays you rather than the other way around. Interest rates for reverse mortgages might be fixed or variable. In the case of fixed-rate mortgages, lenders sometimes demand that the funds be paid in one single payment. Reverse mortgages with variable interest rates are highly popular, but beware: they might drain your equity quicker than you would think.

Third-Party Charges

The worth of your house must be determined since the commodity in a reverse mortgage is your equity. To demonstrate the current worth of your house and calculate your equity, a lender could ask for an appraisal. Title insurance, recording costs, credit checks, and other services required to build the loan’s foundation are examples of additional third-party costs.

Servicing Fees

Each lender determines their own service costs. These costs cover items like account statements, ensuring that you pay your property taxes and homeowner’s insurance on time, and money disbursal. Your interest rate determines how service costs are computed. They may charge up to $30 per month if the loan has a fixed interest rate or an annually adjustable interest rate. They may reach a maximum of $35 for variable interest rates every month. Of course, instead of being paid out of pocket, those costs will be applied to the remaining amount on your loan.

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Is a Proprietary Reverse Mortgage Cheaper Than a Home Equity Conversion Mortgage (HECM)?

No, not always. Although mortgage insurance premiums (MIPs) are not necessary for proprietary reverse mortgages, there are no restrictions on the amount that may be charged for origination or loan servicing expenses. For a clear understanding of what is covered, thoroughly read the contract.

Can I Access All the Equity in My Home?

Typically, reverse mortgages only allow you to borrow up to 50% of the equity that is already accessible in your house. Although it still happens, this is a strategy to prevent you from consuming more equity than you have borrowed on your reverse mortgage.

What Happens at Mortgage Counseling?

Reverse mortgages are a product geared at seniors, thus mortgage counseling goes through all the potential benefits and drawbacks of the loan as they relate to the individual’s condition. This should provide light on whether getting a reverse mortgage is preferable to alternative options like selling the property or getting a home equity loan.

The Bottom Line

Reverse mortgages may provide seniors with poor cash flow a little breathing space, but costs might reduce the amount of money they can use. Most costs may and will be rolled into the overall loan amount, with the exception of the counseling session. In order to determine if a reverse mortgage is appropriate for your scenario, thoroughly examine the itemized costs.

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