WHAT ARE THE TYPICAL COSTS AND FEES I WILL BE LOOKING AT?
According to the Consumer Financial Protection Bureau, reverse mortgages are more expensive than other types of loans. Unlike traditional mortgages, the amount you owe on your reverse mortgage will grow the longer you draw from it. The fees and other costs associated with obtaining a reverse mortgage include origination fees, interest payments, mortgage insurance and closing costs.
Origination fees (capped at $6000) and closing costs are typically one-time costs. Closing costs may include appraisal fees, inspections, credit checks and more. The National Reverse Mortgage Lenders Association (NRMLA) estimates that closing costs for home equity conversion mortgages (HECMs) generally range from about $600 to $2,000.
Your actual costs will be based on the size of your loan and the area you live in. You may be able to roll these costs into the loan. In addition, you will have to pay a mortgage insurance premium of 2% of the home’s appraised value (up to the FHA lending limit of $726,525).
You will also incur ongoing fees associated with your reverse mortgage. These ongoing fees will include interest on your loan, service fees, the annual mortgage insurance premium, property taxes and possibly flood insurance.
Your one-time, upfront fees: The one-time costs associated with obtaining your HECM loan include your closing costs, a loan origination fee and your initial mortgage insurance premium. The average costs associated with these upfront fees are as follows:
Loan origination fee: The loan origination fee is a one-time payment to your lender for the costs associated with making your loan. The federal rules allow HECM lenders to charge $2,500 or 2% of the first $200,000 of your home’s value and 1% of the remaining value of your home. The origination fee for HECMs is capped at $6,000. As an example, if the value of your home is $200,000, your origination fee will be $4,000.00.
Mortgage insurance premium: You will be required to purchase mortgage insurance on your reverse mortgage. You will need to pay an upfront fee of 2% of the home’s appraised value up to the value of the FHA lending limit, which is $726,525. (You will also be responsible for an annual fee, which you will see below.) Once again, as an example, if the value of your home is $200,000, your mortgage insurance premium will be $4,000.00.
Appraisal fee: In order to obtain a reverse mortgage, you will be required to pay for a professional appraisal to determine the current market value of your home. Appraisals are typically done before you obtain your reverse mortgage loan and must be paid for “out-of-pocket”. The cost of an appraisal averages $450. You will also have to pay about $125 for a follow-up appraisal if you need to make repairs to bring your home into compliance.
Repair costs: In most cases, you will be required to pay for costs incurred remedying any structural problems with your home the appraiser points out that do not comply with building codes — such as foundational problems, roof problems or termite damage. Federal regulations require your home to meet these guidelines.
Closing costs: Closing costs are another one-time set of fees, but they can be extensive and are highly variable depending on where you live, what requirements there are for the reverse mortgage you need and how much your house is worth. Below is a table that looks at some potential closing costs and ranges, based on NRMLA data. These costs can usually be tacked onto the loan itself, or can be paid upfront by the borrower.
MONTHLY AND ANNUAL EXPENSES
In addition to your upfront and closing costs, you will also be responsible for recurring charges involved in your loan. These include your annual mortgage insurance premium, which is 0.5% of the outstanding mortgage balance; your homeowners insurance and property taxes, as well as your flood insurance if you are required to hold it; and servicing fees paid to your lender, which is typically a monthly charge of $35 or less.
INTEREST
Insurance rates on reverse mortgages are different than other types of mortgages because you don’t pay interest as you go — you’re receiving money, after all. Because of that, the interest is compounded and charged at the end of the loan, when you sell your house or no longer live in it. You can choose a fixed or adjustable rate.
With a fixed-rate mortgage, the interest rate will stay steady, but you must take one lump sum instead of a monthly payment, and that sum is limited to 60% of the principal limit of the loan.
With an adjustable rate, you can get a line of credit, and only pay interest on the amount you take out — but you are subject to a fluctuating interest rate, either monthly or annually, that might increase quite dramatically. Make sure you speak with a qualified lender extensively about what options work best for your situation.
You have the option of rolling your closing costs into your reverse mortgage loan rather than paying them upfront. The advantage of doing this is that you don’t need to come up with the considerable sum of these fees in order to secure the loan. The downside is that the closing costs will reduce the amount of cash you will have available to you.
Your interest rate will be heavily influenced by the type of payout you choose for your loan. If you get a lump-sum payout, you will be able to qualify for a fixed interest rate, which will often work out to be lower than an adjustable rate. If you receive a line of credit or a monthly payment, you will probably be looking at an adjustable interest rate, and your terms will be different depending on the specifics of your loan.
With a reverse mortgage, you pay interest only on the amount you have drawn. If you choose a lump sum, and you plan to use the money you get from your reverse mortgage quickly, then paying fees upfront and securing a lower interest rate is likely the way to go. If you want to get a line of credit, with plans to use the money in the future, bundling the closing costs into your loan (probably resulting in a higher interest rate), probably makes the most sense.