Some advisors tell you that reverse mortgages are expensive, last-resort financing, while others strongly disagree. Guess what? They’re all correct! This article explains how that can be -- how reverse mortgage fees work, and how to pay as little as possible for a reverse loan.
Government loans offer protection
The most popular reverse mortgage, the Home Equity Conversion Mortgage or HECM, is administered by the federal government, and its fees are regulated. You can pay these charges out-of-pocket, or you can choose to have them taken from the proceeds of your loan.
The HECM fees and charges come in several categories – some are required by the government, and others are negotiated with the lender.
- Mortgage Insurance Premium (MIP)
Mortgage insurance guarantees that you will receive the expected loan advances, even if your lender goes out of business. It also guarantees that you never owe more than the value of the property, no matter how much cash you draw. You pay an initial mortgage MIP at closing, which is either 2% (HECM Standard) or .01% (HECM Saver) of the lesser of the appraised value of your home or the HECM mortgage limit of $625,500. Over the life of the loan, you also pay an annual MIP -- 1.25% of the mortgage balance.
- Third Party Charges
Closing costs from third parties can include an appraisal, title insurance, recording fees, and other charges. You can’t be charged more than the actual cost of these services.
- Origination Fee
The origination fee compensates the lender for processing your HECM. This fee cannot exceed $2,500 if your home is valued at less than $125,000. If your home’s value is greater than $125,000, lenders can charge 2% of the first $200,000 plus 1% of the value over $200,000. HECM origination fees are capped at $6,000.
- Servicing Fee
Loan servicers send account statements, disburse loan proceeds and verify that you pay your real estate taxes and hazard insurance premiums. Lenders may charge a monthly servicing fee of no more than $30 if the interest rate adjusts annually and $35 if it adjusts monthly. Each month, the servicing fee is added to your loan balance.
Like traditional mortgages, loan fees are disclosed on Good Faith Estimates. Know that while the government limits the origination fees that lenders can charge, it doesn’t set the interest rate. In addition, there is no reason that lenders have to charge origination or servicing fees – only the mortgage insurance is required. To get the best deal on a reverse mortgage, then, you’ll still have to contact several lenders and compare their offers – just as you do for a traditional “forward” mortgage.
The best deal on a reverse mortgage starts with choosing the right sort of mortgage and the right payout. For example, if you just want $20,000 for some home improvements on your $400,000 home, and you take out the first loan you’re offered, you could end up paying $3,000 for your origination and $8,000 for your upfront mortgage insurance! That’s what folks mean when they say that reverse mortgages are expensive.
However, you could choose an HECM Saver (which is designed for people who want to borrow smaller amounts) and pay just $40 for upfront MIP! Find a lender charging no origination (that’s part of making them compete for your business) and save another $3,000. Finally, if you plan to make your home improvements over time, it doesn’t make sense to take your proceeds all at once and pay interest before you need to. A line of credit can help you pay less over the life of your loan.
Reverse mortgage counseling
Reverse mortgage counseling (which is required for HECM borrowers) can help you select the right product and choose the best deal on your reverse loan. Get your quotes from competing lenders before you attend your sessions, and go through them with your counselor’s help. It’s a great way to increase your comfort with the process and your confidence in your decisions.