This type of loan differentiates itself from a traditional home equity loan or home equity line of credit (HELOC) by offering an alternative for older homeowners who want to access their equity without increasing their financial burden.
In this article, we’ll go over the costs and fees associated with taking out a reverse mortgage so that homeowners can make an informed decision.
Here is a brief overview of what you can expect to learn:
- How reverse mortgage interest rates work
- Fees associated with taking out a reverse mortgage
- Other costs you may incur while the reverse mortgage loan is active
By the end of this article, you should have an understanding of how much it will cost you to take out a reverse mortgage and as well as the costs and fees you can expect to pay throughout the life of the loan.
What is a Reverse Mortgage and How Does it Work?
A reverse mortgage is a type of loan that is backed by the federal government allows homeowners who are 62 years of age or older to borrow against the equity in their home.
A reverse mortgage can only be used on a property that is the primary residence of the homeowners and has significant equity.
The funds from a reverse mortgage loan will pay off the traditional mortgage, if there still is one. Any remaining funds are typically provided in either a lump sum payment, in monthly payments, or as a line of credit.
The amount of money that you are able to receive is based on the appraised value of the home, the age of the youngest reverse mortgage borrower, and the current interest rate.
The loan funds can be used for any purpose and do not have to be repaid until the homeowner passes away, sells the home, or moves out.
To learn more about how a reverse mortgage loan works, grab a free info kit here.
An Overview of the Upfront Reverse Mortgage Costs and Fees
If you’re considering a reverse mortgage, it’s important to understand the upfront costs and fees associated with it.
If you are unable to pay for these fees out of pocket, these costs can typically be rolled into the loan.
Here are some of the common costs and fees you can expect to pay:
- HUD-Approved Counseling: Before a homeowner can officially submit an application for a HECM reverse mortgage, they must first attend a counseling session with an approved third-party counselor from the U.S. Department of Housing and Urban Development (HUD). Counseling sessions typically range from $125 to $200, however the Consumer Financial Protection Bureau (CFPB) requires counselors to waive fees if the homeowner is unable to afford it and must explain all charges before counseling.
- Origination Fees: Lenders charge homeowners an Origination Fee in order to initiate and process their reverse mortgage loan. This fee is determined using a formula provided by the Federal Housing Administration (FHA) which allows for up to 2% of the first $200,000 of the home’s market value, plus 1% of any remaining amount if the home is worth more than $200,000. Additionally, lenders are allowed to charge up to $2,500 for homes valued at $125,000 or less. The Origination Fee cannot exceed a total of $6,000.
- Closing Costs: Closing Costs for a reverse mortgage typically include title fees, appraisal fees, credit checks, recording fees, document preparation costs, and courier charges. The specific fees will vary depending on state and local regulations as well as the lender that you choose to work with. Be sure to talk with your lender beforehand about what fees may be included in the loan agreement.
- First Mortgage Insurance Premium: The first mortgage insurance premium is payable when your reverse mortgage loan is first originated. This annual fee protects you from potential losses and guarantees that you will receive the expected loan payouts. The premium also includes additional safeguards to ensure a secure process.
How Reverse Mortgage Interest Rates Work
Reverse mortgages rates come as both fixed and variable interest rates, also known as an adjustable rate, depending on how the money is disbursed to you. If your loan is taken out as a lump sum, you have the option of a fixed interest rate that will stay steady throughout the life of the loan.
However, if any of your money is received as a line of credit or monthly payments, you are required to borrow at a variable rate.
Variable rates tend to be lower interest rates than fixed rates at the start of the loan, and they come with a life cap that limits how much the rate can increase over time. The cap is usually either 5% or 10%, depending on whether you get a yearly variable (5% cap) or monthly variable (10% cap). Monthly variable rates are the most common and typically come with a lower starting rate.
It’s important to note that interest is only charged on the funds that have been received.
Interest on a reverse mortgage is calculated daily and added to the balance of the loan each month, but unlike other loans, interest payments are deferred until the end of the loan.
The loan term for a reverse mortgage ends when:
- The home is sold
- It is no longer the primary residence of the homeowners
- The borrowers pass away
Ongoing Costs of a Reverse Mortgage
In addition to the fees associated with securing a reverse mortgage, there are other ongoing costs that homeowners will need to continue to pay throughout the life of the loan:
- Servicing Fees. Reverse mortgage service fees are set in accordance with FHA guidelines, which state that lenders may only charge a maximum of $35 per month. This fee is used to cover the costs incurred by the lender for disbursing payments, sending out monthly statements, and ensuring that the borrower properly maintains their home, pays property taxes, and maintains insurance. However, some lenders may waive this fee altogether.
- Mortgage Insurance Premiums (MIP). MIPs are charged annually on HECM loans. The MIP is charged at a rate of .5%, so if you are charged a 4% interest rate, the total amount payable including the MIP will be 4.5%.
- Homeowners Insurance. All borrowers are responsible for ensuring that they have adequate homeowner’s insurance. Depending on the location of your home, it may also be necessary to purchase additional flood insurance.
- Taxes. Homeowners who obtain a reverse mortgage must ensure that their property taxes are up to date before taking out the loan, and they must continue to keep them current for the duration of the loan.
- Maintenance Costs. When taking out a reverse mortgage, homeowners are still responsible for any repairs and other costs needed to keep the home in good condition.
- Any Required Fees. Homeowners who are part of an association must factor in the cost of Homeowner’s Association (HOA) fees when considering a reverse mortgage. It is important to remember that these fees must continue to be paid even after taking out a reverse mortgage.
Conclusion: Understanding the Costs and Fees of a Reverse Mortgage
A reverse mortgage loan can help you access the equity in your home, but it’s important to understand all the fees and costs associated with it.
One way to keep your costs as low as possible is to consider receiving your funds as a line of credit so that you only have to pay interest on the funds that you use. If you are interested in a fixed-rate reverse mortgage, you will want to opt to receive your loan proceeds as a lump sum payment.
We always recommend that you discuss your decision with your financial advisor and any family members who may be affected by it.
Please reach out to one of our reverse mortgage specialists if you have any questions or would like more information. We’re here to help!
Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.