Reverse Mortgage Fees, Closing Costs, and Ongoing Expenses
Before getting into reverse mortgage fees and costs, it is important to recognize one important fact: There are two main types of reverse mortgages. And the amount of those reverse mortgage fees and costs are likely to be different for each.
- HECMs – The most popular reverse loan by far are home equity conversion mortgages (HECM). The Federal Housing Administration (FHA) guarantees a chunk of the amount you borrow with each of these. As a result of that involvement, HECMs are subject to much stricter rules and regulations than their purely private counterparts. That makes them less flexible than the others, but also provides valuable consumer protections.
- Private reverse mortgages – With these, you do a private deal with a private lender. The government does not have financial involvement and, while there are some legal and regulatory constraints, the terms are mostly whatever suits both parties. This can be beneficial if HECM regulations stop you from getting what you need. But many reverse mortgage rules arose because borrowers were getting into trouble and needed protections. So, it is worth being extra cautious and taking independent professional advice before signing up for one of these.
All this means you can, within limits, negotiate whatever reverse mortgage fees and closing costs you want when you do a purely private deal. Indeed, if your lender is confident they are going to make a handsome profit on your mortgage, they might even waive those upfront fees altogether.
Therefore, the information below applies only to HECMs.
Upfront Reverse Mortgage Fees
Just because you do not have to make monthly payments on a reverse loan does not mean that it stops being a mortgage. So, inevitably, you are going to have to pay a few reverse mortgage fees and closing costs. Fortunately, your lender will most likely offer the option of rolling those up within your new loan rather than finding the cash yourself.
The reverse mortgage fees you are going to pay will mostly be familiar from your previous home mortgages:
- Lender fees – You will pay somewhere between $2,500 and $6,000. This is according to a set sliding scale based on the value of your home. If your home is worth $400,000 or more, the lender fee will be $6,000.
- Real estate closing costs – The list of big expenses includes appraisal, title insurance, and inspection fees. Smaller charges may include a credit report, escrow service, and maybe a flood certificate or pest inspection. You may be able to shave something off these costs if you shop around for good deals.
- A counseling session – A reverse mortgage counseling session with an independent, approved, financial counselor is mandatory before you can sign for an HECM (and highly advisable for a private reverse loan). This usually comes in at $125, but may be less. HUD may waive the counseling fee if you cannot afford to pay it. You can find a nearby, approved counselor using the look-up tool on the U.S. Department of Housing and Urban Development website.
- Upfront mortgage insurance – The amount you have to pay as a mortgage insurance premium will vary greatly. It is mainly dependent on how big a proportion of the total benefit you get from the loan you access in the first year. If at all possible, you want to access less that 60 percent of it. Use more than that during the first 12 months you have the loan and you will pay a bigger premium. Not just a bit bigger: five times as much!
Understanding Upfront Mortgage Insurance in Great Detail
Let’s look at an example, and, for the sake of easy math, say your HECM has allowed you to borrow $100,000. If you withdraw $59,999 or less during the first year you have the loan, your mortgage insurance premium will be 0.5 percent of the appraised value of your home. If you withdraw $60,001 or more during the first year you have the loan, your premium will be 2.5 percent of the appraised value of your home.
How much you can borrow depends on many factors, but suppose your home is worth $200,000. Withdraw less than 60 percent of the funds made available by your loan during the first year and your mortgage insurance premium will cost you $1,000 ($200,000 appraised value x 0.5 percent premium = $1,000). Withdraw more than 60 percent of the funds made available by your loan during the first year and your mortgage insurance premium will cost you $5,000 ($200,000 appraised value x 2.5 percent premium = $5,000).
This is one of those irritating regulations that the federal government imposed on HECMs and that you may be able to skate around if you go for a purely private deal. However, try to understand that the government put these regulations in place to address a real problem. Many borrowers who took most, or all, of their available funds in the first year found themselves in real trouble later. Some even faced reverse mortgage foreclosure. It is important that you recognize the risks and think this through carefully.
Pay Reverse Mortgage Fees and Closing Costs Now — Or Later?
The best thing about reverse mortgages is that, potentially, you never have to make monthly payments. However, in some ways, that is also the worst thing about these mortgages. Many of us find it hard to anchor in our minds the concept of a loan that we don’t need to repay. Why should you care about its terms? Honestly, one day, someone will need to repay the loan. It will become due and payable with all the interest and charges that have accumulated over time.
On the one hand, you may have passed on by then, in which case you won’t have to worry about it. On the other hand, maybe you’ll be alive and well, but will be in the process of moving out of the home that has a reverse mortgage on it. Bottom line: be sure you have a plan on how you’ll handle repaying the loan if that time happens to come.
Take the terms of the loan very seriously. Shop around for the best deal on your HECM or private reverse mortgage. Think through the implications of rolling up your reverse mortgage fees and closing costs into your loan. To start with, you may be reducing the funds that are available to you. The Consumer Financial Protection Bureau warns:
Think twice before deciding to pay for upfront costs using your loan funds. Paying for upfront costs with loan funds is more expensive than paying them out of pocket. If you use your loan funds to pay for upfront costs, you will be charged interest and ongoing mortgage insurance on these costs. This means the total amount you will pay for these costs will be more than if you paid for them out of pocket.
Ongoing Reverse Mortgage Costs
Two very different categories of costs will continue to be important throughout your HECM or private reverse loan:
- Costs that are added to your mortgage account. These mostly comprise annual mortgage insurance premiums and, more importantly, interest payments – including interest charged on accumulated interest. If you are still living in your home when you pass, you need never worry about these. However, if you ever want to sell your home, you will find that these costs have eaten into the equity you thought you had in the property. As a result, your heirs will inherit less than they might otherwise have expected. However, you and your heirs’ liabilities are capped at the market value of your home at the time of its sale or your death. If your lender makes a loss beyond that value, it is their problem. To quote legal website Nolo, “… deficiency judgments are not allowed with reverse mortgages.”
- Continuing homeownership expenses that you must pay out of your own pocket. All prudent homeowners have continuing financial obligations they must meet, including property taxes, hazard insurance, property maintenance costs, and sometimes homeowners’ association fees. With any sort of reverse loan, these will almost certainly be conditions of your loan. Fail to keep up with any of them, and you could face foreclosure.
Keep in mind that one of the reasons why the federal government introduced regulations on reverse loans was because too many borrowers ended up facing foreclosure in the past.
How to Pay Ongoing Homeownership Costs
You can take your payout from your HECM in three main ways:
- A line of credit – You get a limit, like you would with a credit card. This will allow you to keep drawing down money until you reach that limit.
- Tenure – You get a fixed monthly income for the rest of your life – or until you move. If there are two of you on the HECM agreement, then the income lasts until the last person passes away.
- Term – You get a fixed monthly income for an agreed number of years. After that, the income stops.
Additionally, you can combine a line of credit with either a term or a tenure. That should give you a smaller monthly income, but access to lump sums to cover emergencies. Having a continuing income and/or access to a line of credit can help you stay current with property taxes, hazard insurance, property maintenance costs, and any homeowners’ association fees.
Knowledge Is Power
For the right borrower, in the right circumstances, an HECM can add confidence to an otherwise uncertain retirement. For others, it may lift them out of poverty when they are least able to earn. These are good things.
However, you need to fully understand what you are getting into. That means you should thoroughly research reverse mortgages so that you are better informed. To take it a step further, you should speak to independent counselors who are experts in this field. Knowledge is power when it comes to negotiating reverse mortgage fees and ongoing costs.