Are “Hefty Fees” Really A Drawback of the Reverse Mortgage?

Are Reverse Mortgage Closing Costs Really High?An all too common statement is that a drawback of the reverse mortgage is the hefty or high up front fees.  But are they really hefty?  Are the fees really a drawback?

First, have you looked at the fees to obtain a conventional mortgage?   Do you realize the reverse mortgage fees compare to a conventional mortgage with the FHA Mortgage Insurance Premium being the difference?  I’ve done side-by-side comparisons.

These comparisons reflect the third-party fees, including the appraisal, credit report, flood certificate, title fees, recording fees, Minnesota Mortgage Registration Tax, etc. are almost identical.  Actually because HUD regulates the fees, mark-up and junk fees or processing fees aren’t allowed so the third-party fees may even be a little less than a conventional mortgage.

Another fee associated with both the reverse mortgage and a conventional mortgage is the origination fee, the fee that covers the lender’s time and costs associated with originating the loan including: loan officer’s and staff’s salary, licensing, administrative costs, business overhead (computers, electricity, health insurance, marketing, processing, underwriting,) etc.  The underwriting fees are generally additional fees on conventional loans but have to be included in the origination fee on FHA reverse mortgages loans.

On a conventional mortgage one can “buy” a lower interest by paying a higher origination fee or a lower interest rate with a higher origination fee.  The reverse mortgage is similar however the rate versus paying an origination fee or not is determined by the product (fixed or adjustable rate) and what the lender sets as allowable.  For example, with the fixed rate one may have zero origination fee but the interest is a set amount determined by the lender or there may be a lower interest rate but the FHA allowable origination fee is included.  (2% of the first $200,000, 1% on thereafter, with a cap of $6,000).  Again the fee is comparable between a reverse mortgage and a conventional mortgage.

The fee that really makes the difference from a conventional mortgage is the FHA Mortgage Insurance Premium (MIP).  The most common reverse mortgage, and only one available in Minnesota, is the HUD Home Equity Conversion Mortgage or HECM.  With the Standard Reverse Mortgage the up-front MIP is 2% of the home value.  (The MIP on a forward FHA loan is currently 1.75%.)

The many benefits of paying the FHA MIP on the reverse mortgage include:

  • Guaranteeing the funds are available for you.
  • Guaranteeing the lender against default or shortfalls
  • Keeping the interest rates lower, the interest rates have historically been lower 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; FHA makes up the difference if the loan balance is higher than what the home can be sold for.
  • Requiring counseling by a third-party HUD trained and approved counselor.
  • The HECMs are highly protected.  See my Blog article “You Need To know Reverse Mortgage Borrowers Are Highly Protected.”

One must understand that the reverse mortgage is an open-ended term loan (the due date on the mortgage is the youngest borrower’s 150th birthday*) with no limit to how high the balance can grow and the collateral is only limited to the property (a non-recourse loan with no personal liability to the borrower or the heirs).  With FHA’s generous allowance of proceeds, not based on income, assets, or credit scores, some reverse mortgages will end up with loan balances higher than the value of the home either due to the current declining home values or the nature of the loan with no monthly payments being made and accrued interest and on-going FHA MIP (essentially one is borrowing these fees each month).  Therefore the MIP and other closing costs are necessary to make the program viable and are not a drawback to the reverse mortgage.

When comparing the costs of a conventional mortgage to the HECM Saver program which reduces the upfront MIP to .01%, the fees are essentially the same.  However, in exchange for the reduced upfront MIP, reverse mortgage borrowers receive fewer funds and the interest rate is higher.

It’s important to note that the fees become part of the reverse mortgage loan balance – there are no out-of-pocket fees other than the cost of the appraisal.  So borrowers are not required to come up with the money to cover the fees before they do a reverse mortgage.

If one thinks about it selling one’s home could also be considered expensive with similar fees to the reverse mortgage (the generally higher real estate agent’s commission and again the FHA MIP is the difference).  Are the real estate commission and closing fees a drawback to selling one’s home?

Besides looking at the costs of a conventional loan or selling one’s home, how expensive are credit cards?  While they don’t have up front costs, the interest on credit cards can be outrageous which over time this can make the credit card expensive.  We often find seniors have high credit card debt because that is what they are using to finance their living expenses.  The cost of credit cards don’t seem to be a drawback, people still get and use credit cards.

Reverse Mortgage benefits outweighed the costsIf a senior can’t afford to make mortgage payments, if they need funds for repairs, for home care or medical expenses, for daily living expenses, for the extra elbow room, funds to make that trip for a family reunion or wedding, or even to be able to check something off their bucket list, the benefits may outweigh the costs.  The security, independence, dignity and control and peace of mind received from the reverse mortgage may outweigh the costs.

Do you not refinance or purchase a home because the of the fees on a conventional loan?  And what about the costs of surgery?  Would you not have surgery if it would improve or save your life just because of the fees?  The cost of food is going up but do you do without food because of the costs?   Not if the benefits outweigh the costs, right?  Well, if the benefits of the reverse mortgage outweigh the costs, then the fees are not a drawback of the reverse mortgage.

*The reverse mortgage is due and payable when the home is no longer the primary residence of the borrower(s), i.e. when they sell, move, die.  The due date on the reverse mortgage is the 150th birthday of the youngest borrower rather than a 15 or 30 year term on a conventional mortgage.

© 2012 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

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