Reverse Mortgage Fees
Home Equity Conversion Mortgages (HECMs), also known as Reverse Mortgages, are gaining in popularity as aging homeowners are looking for solutions to supplement their income.
In a reverse mortgage, the homeowner, age 62 or older, can borrow against their home’s equity and receive cash in a lump sum, monthly advances or both. Unlike traditional mortgages, the homeowner actually receives money instead of making payments to the lender. These funds are available as regular monthly installments, a lump sum or partial lump sum, a line of credit, or a combination of all three. A reverse mortgage or line of credit does not have to be repaid until the last surviving homeowner no longer uses the home as their primary residence.
Before you choose a reverse mortgage agreement, take the time to familiarize yourself with the fees and closing costs associated with this type of financing. The following is a simple breakdown of some fees that are generally required in a reverse mortgage.
1. FHA Mortgage Insurance
A standard reverse mortgage’s upfront insurance premium is 2% of the property value, up to the HUD’s property value limit. The FHA insurance protects the homeowner and his/her heirs from personal liability if the balance of the loan exceeds the value of the home when it sells. Any remaining equity always remains with the homeowners or their beneficiaries. Any losses are absorbed by the federal government through an insurance fund designed for this purpose.
2. Origination Fee
The origination fee is what the lender will earn on the reverse mortgage. The lenders set their origination fees based on a formula developed by the FHA. Here is the formula:
2% of the first $200,000 of property value and 1% of the second $200,000 of property value.
The maximum fee is $6,000.
3. Title Fees
The title is what guarantees the homeowner’s legal ownership of the property and is required for any type of mortgage – not just reverse mortgages. Title fees are those fees associated with insuring, settling, recording and notarizing the title. These costs will vary, as title insurance costs can vary from state to state.
An official appraisal will confirm the current market value of the property. In a reverse mortgage situation, the appraisal is conducted by an FHA-approved appraiser and follows very specific FHA guidelines. Reverse mortgage appraisals typically require more documentation and detail than an appraisal done for a conventional mortgage. Depending on where you live, you should expect to be charged between $475-$550 for an FHA appraisal.
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Here are a few other costs associated with reverse mortgages:
1. Counseling (You may be able to get this for free or at a reduced cost – speak with your lender or click here for details: http://portal.hud.gov/hudportal/HUD?src=/i_want_to/talk_to_a_housing_counselor)
2. Credit Report
3. Wire Fee
4. Flood Certification Fee (if the property lies in a flood zone)
You can request a Good Faith Estimate from a reverse mortgage lender to get an idea of how much your reverse mortgage closing costs and other fees will cost.
While a reverse mortgage may sound like a great option for senior homeowners, it’s not the best option for everyone. There are risks involved in taking out a reverse mortgage – which is why in order to qualify for one, the client must receive homeownership counseling. Make sure you take time to educate yourself on the potential risks of a reverse mortgage as well as the benefits. Your Alpha Mortgage Advsior is committed to the principles of sound decision making and complete customer education. We encourage clients to slow down and consider advice from other trusted advisers like their financial planner, estate/tax planning attorney and/or loved ones.
Please note that fees listed on this page are for illustrative purposes only and may vary. Other fees, terms, and conditions may apply. Consult with a licensed mortgage professional for the most up-to-date information.