It seems like every article, report or someone you talk with states the reverse mortgage closing costs are high. Have you looked at closing costs on a conventional home mortgage?
As with a conventional home mortgage (called a “forward” by HUD), the closing costs for reverse mortgages may vary depending on the home value and the complexity of the loan. Let’s compare the costs side-by-side for a Home Equity Conversion Mortgage or HECM and a conventional/forward mortgage.
The third party and recording fees are standard for any loan. Keep in mind that there has to be a cost involved because everyone in the transaction needs to be paid for their services. If the costs on a mortgage aren’t paid up-front then they’ll be paid over time with a higher interest. Look at an estimated comparison based on a Minnesota home valued at $200,000:
|Third Party Fees||Reverse FHA||Forward||Forward FHA|
|Escrow, Settlement, or Closing||$275||$275||$275|
|Abstract or Title Search||$110||$110||$110|
|County/Mortgage Registration Tax||$295||$384||$384|
|Special Assessment Search||$35||$35||$35|
|TOTAL THIRD PARTY FEES||$2,357||$2,142||$2,238|
* These fees are included in the Qualified Mortgage (QM) Rule; included in as part of the “Closing Costs” under Lender Fees.
Now let’s compare the Lender Fees:
FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA. The FHA reverse mortgage includes a .5% or a 2.5% initial mortgage insurance premium, determined by the funds being drawn in the first twelve months. The advantages with FHA insuring the reverse mortgage include:
- Guaranteeing the funds are available for you during the term of the loan.
- Guaranteeing the reverse mortgage lender against default or shortfalls means the interest rates are lower compared to other mortgages for the benefits one receives with the reverse mortgage.
- Providing a line of credit growth rate (available only with reverse mortgages).
- As a reverse mortgage it is a non-recourse (no personal liability) loan; the FHA MIP will cover the difference to the lender rather than the borrowers or their heirs having to come up with the difference
The origination fee is what the originating lender receives to cover the loan officer’s compensation, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc.. The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans. HUD regulates the reverse mortgage origination fee to be 2% of the 1st $200,000; 1% thereafter with a cap of $6,000. With a minimum of $2,500.
In some situations the lender will offer no or a reduced origination fee however the interest rate will be higher than if one pays the origination fee.
The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination. One is essentially borrowing the interest and mortgage insurance premium each month because they are not making a payment. And as one draws from their line of credit or through monthly payments the loan balance will increase making the loan amount higher.
An estimate based on a $200,000 home value (based on loan amount at 80% for the Forward loans):
|LENDER FEES||REVERSE FHA||FORWARD||FORWARD FHA|
|SUBTOTAL LENDER FEES||$5,000||$4,800||$5,300|
|TOTAL LENDER FEES||$5,000||$5,175||$5,675|
*QM Rule closing costs cannot exceed 3% of the loan amount. Number of points are directly related to interest rate charged; the more points paid the lower the interest rate; the lower points paid, the higher interest rate.
** Based on .5% – taking 60% or less within the 1st 12 months.
*** Conventional loans may have a Private Mortgage Insurance fee.
**** Forward loans have up-front prepaid interest due for remaining days in the month of closing; this is an example amount. Funds will also be needed up-front to set up escrow.
|TOTAL LOAN FEES||REVERSE FHA||FORWARD||FORWARD FHA|
NOTE THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM! Refer to above comments on the benefits of FHA insuring the reverse mortgage.
The fees associated with the reverse mortgage are fully financed as part of the loan with no out of pocket expenses other than the FHA appraisal. (As of 2010 Appraisal Management Companies must be used to order and process the appraisal. This fee is required to be paid for by borrower up front or “out of pocket.”) All of the fees for reverse mortgages and forward mortgages must be disclosed on the Good Faith Estimate (GFE).
When considering whether to do a forward mortgage or a reverse mortgage you must consider if you can even qualify for a forward mortgage; then if you can make the payments over time. For example, what happens if “life happens,” could you continue making those payments or would you be facing foreclosure?
You also need to consider that if you do a forward mortgage now (if you even qualify), you’ll be paying the closings costs on that loan and then when you need more funds in the future and you refinance you’ll be paying the closings costs again.
Whereas with the reverse mortgage you pay the closing costs up-front and then without paying closing costs again you have access to more funds through your life as long as you are living in the home as your primary residence. The additional funds would be either through monthly payments, a line of credit if that is the type of loan you have chosen.
Consider the benefits of the reverse mortgage which include:
- No monthly mortgage payments, therefore increase your cash flow.
- With no monthly mortgage payments required the risk of default due to not being able to make monthly mortgage payments is reduced. (Borrowers are still required to pay property taxes, keep hazard insurance on and maintain the property and pay home owners association dues if applicable.)
- A line of credit option which has a growth rate making more funds available to you in the future, no other mortgage offers this. Or you can use the funds to receive monthly payments either as tenure (life of the loan) or an amount set by you.
- Non-recourse, no personal liability to you or your heirs.
Now that we’ve compared the costs side-by-side, are you surprised that they are comparable to a conventional loan?
Comparison of fees first published 2009; Updated 2014; updated 12/3/2014
© 2009-2014 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648
This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-Z3
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Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.
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