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. However, with the reverse mortgage HUD regulates the fees and requires that only the actual cost may be charged to the borrower, they do not allow mark ups such as processing or servicing fees. 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||$250||$250||$250|
|Abstract or Title Search||$100||$100||$100|
|County/Mortgage Registration Tax||$323||$480||$480|
|Special Assessment Search||$30||$30||$30|
|TOTAL THIRD PARTY FEES||$2,196.50||$2,262.50**||$2,328.50|
* Courier Fee is for sending a payoff on a current mortgage to the mortgage holder.
** These fees do not include all mark ups/processing fees so these may be higher when mark ups/processing fees are included.
Now let’s compare the Lender Fees:
FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA. With the FHA HECM Standard this is 2% of the home value and 2 1/4% for a forward. The FHA HECM Saver has a reduced MIP. The advantages with FHA insuring the reverse mortgage include:
- Guaranteeing the funds are available for you.
- Guaranteeing the lender against default or shortfalls which means the interest rates are lower (currently under 3% on the HECM Standard Adjustable Rate) compared to other mortgages.
- Providing a line of credit growth rate (available only with reverse mortgages).
- Ensuring as a reverse mortgage it is a non-recourse (no personal liability) loan.
The origination fee is what the originating lender receives to cover the loan officer’s salary, 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.
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.
An estimate based on a $200,000 home value:
|LENDER FEES||REVERSE FHA||FORWARD||FORWARD FHA|
|SUBTOTAL LENDER FEES||$8,000||$2,700||$6,200|
|TOTAL LENDER FEES||$8,000||$4,700||$8,200|
*Typical points on Forward loans are 0-4%; this example is based on $100,000 loan at 2% points.
** Forward loans often have a 1% back-end fee.
*** 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.
|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 loan.
Because the majority of conventional loans being done now are FHA insured, the reverse mortgage is actually less expensive.
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 must be disclosed on the Good Faith Estimate (GFE).
Keep in mind that there has to be a cost involved because everyone in the transaction needs to be paid for there services. If the costs on a mortgage aren’t paid up-front then they’ll be paid over time with a higher interest.
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. These together can equal or exceed the total of the closing costs on the reverse mortgage.
Whereas with the reverse mortgage you pay the closing costs upfront 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.
In the big picture the cost of the reverse mortgage is less than a forward mortgage over time because the interest rate is lower on the reverse mortgage. Therefore typically it doesn’t take too long for a forward mortgage to make up and then exceed what difference there is in closing costs of the reverse mortgage.
Now that we’ve compared the costs side-by-side, are you surprised that they are comparable to a conventional loan?
Article updated May 2012
© 2011-2012 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-t4
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