A reverse mortgage loan can be an excellent financial resource for retirees. As with any type of financial tool, it is important to have a clear understanding of all of the costs associated, including closing costs and lending fees (finance charges) and applicable interest rates, before proceeding forward. In order to help you understand the true upfront and ongoing costs of a reverse mortgage loan, we have broken these down below.
Please note that the reverse mortgage fees associated with your loan will vary depending upon the services your lender provides and the type of disbursement/payouts you select, amongst other factors. A benefit of this loan is the ability to finance many of the closing costs into the loan itself to minimize the impact of any up-front, out-of-pocket charges.
Appraisal Fees: Prior to underwriting the loan, a third-party appraiser is assigned by the lender to evaluate the value of the home and the property it sits on. Appraisal fees vary throughout the country, but the average price is $450 according to NRMLA (National Reverse Mortgage Lenders Association). If the appraiser determines that repairs need to be made to the home, they will need to make a second visit to verify the repairs. Appraisers typically charge $100-150 for the follow-up visit. For more information on these and other fees, see the NRMLA Application, Fees, and Disclosures webpage.
Closing Costs: These are costs associated with traditional mortgages as well as reverse mortgages. Below is a quick breakdown of the expected costs as provided by NRMLA. These costs can be rolled into the reverse mortgage loan amount, and may not need to be paid upfront by the borrower.
Initial Mortgage Insurance Premium: This up-front fee is charged by the government and is intended to cover the guarantees provided by the FHA to the lender and the consumer. The amount is paid upfront at closing, and is either .5% or 2.5% of the loan amount (2.5% is charged if more than 60% of the loan is accessed within the first year).
Loan Origination Fee: The origination fee is charged by the lender. The amount of the fee will directly depend on the value of the home in question. HECM (Home Equity Conversion Mortgages) are strictly regulated by HUD, and are FHA insured. This means that there is a strict government-mandated cap on the origination fees and percentages. For example, if a home is appraised at a value of $750,000 the maximum amount that can be charged for an origination fee is $6,000. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. Note: there is a maximum cap at $6,000 however, regardless of the home’s appraised value.
For more information on these costs, visit the NRMLA Reverse Mortgage Fees page.
Interest: Interest is charged each year just as with other mortgage products. On a traditional mortgage loan, interest along with principal is paid each month by the borrower until the loan is paid. With a reverse mortgage, the opposite occurs- the borrower receives principal each month (and pays no interest) until the loan is due and payable at which point the principal and the interest must be paid off. To learn more about how your interest rate will be calculated, see the interest rates section below or review our reverse mortgage interest rates page.
MIP (mortgage insurance premiums): HECM borrowers are charged MIP on an annual basis, however these fees accrue over time and are paid once the loan is due and payable. The annual mortgage insurance premium is 1.25 percent of the outstanding loan balance.
Responsibility for home costs: Continuing to pay property taxes, insurance, maintenance and other homeowner costs is required with a reverse mortgage loan. With the involvement of lienholder, the possibility of foreclosure exists if the borrower violates the terms of the mortgage such as by not paying property taxes or neglecting the property. Note: borrowers have a legal right and a window of time to cure a default to prevent or stop a foreclosure from the lender.
Servicing fee: Typically $35 per month or less according to NRMLA
Lending rates are synonymous with interest rates. When looking into purchasing a house, refinancing or applying for a reverse mortgage loan one of the first things that people ask is, “What is the current interest rate?”
An interest rate is a percentage of the loan amount and is the ‘price’ paid by the borrower for the loan.
Types of Interest Rates: Adjustable and Fixed Rate
Adjustable and fixed interest rates are available when buying a home or taking out a reverse mortgage loan.
With an adjustable rate mortgage, otherwise known as ARM, interest rates can and do fluctuate over time. Adjustable rate mortgages are useful for borrowers because the introductory rate is usually lower than a fixed rate at the time of purchase.
Compared to an adjustable rate mortgage, a fixed rate mortgage rate is set when the mortgage is taken out and it will not change over the life of the loan. With reverse mortgage loans, a fixed interest rate will usually result in a smaller total loan amount, however the interest rate will not change and an accurate projection can be made of the total cost of the loan.
What Are the Current Interest Rates for Reverse Mortgage Loans?
The interest rates on HECMs are comparable to other fully amortized mortgages. The interest rate a borrower pays is made up of the “index” and the “margin.” The index is the market interest rate – the London Interbank Offered Rate (LIBOR) index is commonly used. The margin is set by the lender, and depends on the level of service offered to the borrower. As of November 2016, the NRMLA website calculates reverse mortgage examples using a variable 1-month LIBOR index of .533% with an average margin of 2.50%, for a current reverse mortgage loan interest rate of 3.033% (known as the Initial Loan Interest Rate). Other rates and indexes are also available for example calculations*.
While the interest rate index can change over time for an adjustable interest rate loan, the margin cannot change and stays the same throughout the loan term.
With reverse mortgage loans, the borrower’s specific needs usually influence the choice of interest rate (fixed or adjustable) and the method of distribution (how and when the borrower can access their money). A line of credit and monthly disbursements, for example are available amongst other options.
If you determine that a reverse mortgage loan is the right option, one way to financially prepare for it is to educate yourself on typical fees and costs. As mentioned before, some fees are put in place for borrower protection and many fees are federally capped or strictly regulated to provide an additional level of security for the borrower. Some fees can be waived or negotiated, and most of them can be rolled directly into the loan itself, greatly minimizing the impact of upfront, out-of-pocket expenses. Click here to learn more.
*Interest rates mentioned are for illustrative purposes only and are not an offer to lend. Interest rates and amortization, mortgage insurance premiums (MIP), origination fees, lender margins, payment options and closing costs are subject to change and may vary. Amortization tables and APR calculations will be provided by your lender in the loan application package. A good faith estimate of closing costs, TALC disclosure and other disclosures will also be provided on the loan application as required by the Truth in Lending Act and Regulation Z.
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“FHA HUD Consumer Fact Sheet for HECM.” HUD.gov. n.d. Web. July 16, 2014. http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_13006.pdf
“What are the Costs I will Have to Pay for a Reverse Mortgage?” ConsumerFinance.gov. April 17, 2014. Web. July 16, 2014. http://www.consumerfinance.gov/askcfpb/237/what-are-the-costs-i-will-have-to-pay-for-a-reverse-mortgage.html
“Your Road Map to a Reverse Mortgage: Application, Fees, & Disclosure.” ReverseMortgage.org. n.d. Web. July 16, 2014. http://www.reversemortgage.org/YourRoadmap/4ApplicationFeesDisclosures.aspx
Santiago, Steve. “The Ins and Outs of Reverse Mortgages.” Bankrate.com. n.d. web. July 16, 2014.