True Costs of a Reverse Mortgage Loan
In the same way you likely had lots of questions about the various fees and costs of the traditional mortgage you used to buy your house, you probably now have similar ones about a reverse mortgage:
What is the cost of a reverse mortgage? How much are reverse mortgage fees? What’s the interest rate for reverse mortgages? What decides the rate?
The truth is, fees and costs apply to any kind of mortgage, including reverse mortgages.
As with any type of financial tool, especially one you’re considering for retirement, it is important to have a clear understanding of its associated costs. With this information, you can begin to objectively compare one home equity strategy, is this case a reverse mortgage, versus others, such as refinancing or selling your home.
By selling your home, for instance, your costs could include $30,000 in real estate commissions (6% of a $500,000 sale = $30,000) alone, before factoring in home repair, staging, inspection, relocation, title insurance, transfer tax and other costs and fees.
To help you better understand the costs of a reverse mortgage, we’ve broken down the costs into fees, interest rate, insurance costs and ongoing costs.
As important as the numbers are, don’t lose sight of the big picture. Where do you see yourself thriving the most in retirement: In your current home updated and improved so you can safely and comfortably age in place or in a new home and community that your current situation can’t offer?
Know your numbers, but also know your heart.
Reverse Mortgage Fees
Fees largely reflect the cost of services required throughout the reverse mortgage process, including many that exist for the borrower’s protection. Many of these fees are federally capped or strictly regulated.
An appraisal assigns a value to your home, which is an important factor in determining your loan amount.
Appraisal fees vary by region, home type and value, but average $450.
The appraisal also is conducted to ensure the home is structurally sound and complies with all safety and local building codes. If the appraiser calls out structural defects, you must hire a contractor to complete the repairs, which will require a follow-up visit by the appraiser for sign-off. Appraisers generally charge $125 for this second check.
The origination fee covers your lender’s operating expenses associated with originating your reverse mortgage.
Fees vary from lender to lender and are capped by the FHA. For homes valued at $125,000 or less, the origination fee is capped at $2,500. For homes worth more than $125,000, the lender is allowed to charge 2% on the first $200,000 and 1% on the value of the home above $200,000 for a maximum of $6,000.
Closing Cost Fees
Closing costs cover a range of services required to complete your reverse mortgage. Below is a quick rundown of common costs provided by NRMLA. These costs can be rolled into your reverse mortgage loan amount, reducing your out-of-pocket expenses.
The service fee covers the projected cost of servicing your account for the life of the loan. The FHA caps this fee at $35 a month. AAG typically waives this fee.
Counseling addresses all aspects of the reverse mortgage process, including the loan’s advantages, potential drawbacks, and eligibility requirements. The fee is about $125, according to NRMLA. It is one of the few fees you cannot roll or finance into your loan.
Interest Rate for Reverse Mortgages
Your interest rate is expressed as a percentage of the loan amount you borrow. This rate will stay the same over the life of your loan if you select a fixed-rate reverse mortgage, and this rate will fluctuate if you select an adjustable-rate reverse mortgage.
A fixed rate will usually result in a smaller loan amount; however, the interest rate will not change.
An adjustable rate usually offers a lower introductory rate because the borrower is assuming some of the lender’s interest rate risk, in the event of a rising-rate environment. Adjustable rates also come with more reverse mortgage payment choices. (For some historical context, mortgage rates steadily declined for more than 30 years, from 1981 through most of 2014 and today remain in the low single digits.)
The interest rate you pay is based on multiple factors, including your lender’s cost in acquiring the money it’s lending you (their cost of funds is tied to a major financial index like the London Interbank Offered Rate or LIBOR or a government agency like the U.S. Treasury Department). Other key factors influencing the rate you receive are your credit history, the home’s price and location, interest-rate type (fixed or adjustable), existing mortgage liens, loan size and the reverse mortgage disbursement method you select.
Your interest rate is calculated daily and added to your loan balance monthly. This amount is indicated in your monthly statement. A reverse mortgage is unlike a traditional mortgage in that you can defer payment of your loan balance (principal, interest and FHA mortgage insurance premium) until you sell or move out of the home or pass away. However, you must continue to maintain your home, pay property taxes and homeowners insurance and comply with your loan terms.
Try our Reverse Mortgage Calculator by clicking here. It requires no personal information and estimates the total proceeds you may receive from a reverse mortgage.
Reverse Mortgage Insurance Costs
The Mortgage Insurance Premiums (MIPs) are what you pay to the FHA to protect you and your lender and, by extension, the integrity of the reverse mortgage program. Here are three examples:
- If your loan balance exceeds the value of your home when you sell, move or pass away, neither you nor your heirs are responsible for making up the difference.
- If the proceeds you receive exceed your original loan amount (you exceeded your projected life expectancy on which your loan was based), you continue to receive them according to your disbursement plan.
- If the company servicing your loan can no longer meet its obligations to you, the FHA assumes responsibility for your loan, providing you with uninterrupted access to your remaining proceeds.
The upfront MIP equals 2% of the home’s appraised value or FHA lending limit ($726, 525), whichever amount is less.
The annual MIP is 0.5% of your outstanding loan balance. This amount does not come out of your loan proceeds, but accrues over time and is paid when the loan becomes due.
You should note that traditional FHA-insured loans also include upfront and annual insurance premiums.
Ongoing Costs for Reverse Mortgages
With a traditional mortgage, you pay principal and interest to your lender each month. With a reverse mortgage, you receive principal from your lender and pay no interest until the loan matures. Although you no longer have a mortgage payment, you continue to pay property taxes, homeowners insurance, maintenance and other homeowner costs, as you would with any mortgage.
In the event you feel as if it would be a hardship in meeting these expenses, you have the option to establish a Life Expectancy Set-Aside or LESA to pay your ongoing property taxes and homeowners insurance over the life of your loan.
To make the reverse mortgage process as transparent as possible, you will receive a number of documents showing you the cost of a reverse mortgage.
One document, the Total Annual Loan Cost (TALC) Disclosure, illustrates the cost of the loan over different durations.
Another document, the Good Faith Estimate (GFE), discloses in detail the various fees that are being charged.
Other disclosures, like an amortization table, are provided to keep you fully informed about the costs associated with your reverse mortgage.
Talk to Your AAG Professional
An AAG professional can walk you through all the numbers that make up the cost of a reverse mortgage. If you would like to talk about particular reverse mortgage fees, the current interest rate for reverse mortgages, or any other aspect of a reverse mortgage loan, we look forward to your call and helping you further explore whether a reverse mortgage or another home equity solution can help you achieve the retirement you want.
Call us today! (866)-948-0003