It seems that there is some confusion regarding the costs associated with a reverse mortgage. In my opinion, this is not the fault of reverse mortgage lenders – though, perhaps they could do a better job in this aspect – but rather do to the very nature of reverse mortgages. Since the initial flow of funds is entirely one-way, borrowers often don’t conduct adequate due diligence and fail to properly understand all of the costs. In any event, allow me to offer some clarification.
The first set of costs are levied when the borrower initially obtains the reverse mortgage. First is the origination fee, which is charged directly by the lender in order to cover overhead and other administrative costs. Generally, this is assessed as a fixed percentage of the value of the home: 2% of the appraised value of the home up to $200,000 and an additional 1% on any portion exceeding $200,000. Then, there are a handful of third-party closing costs, including appraisal fee, credit report, title insurance, recording fee, flood certification, etc. Finally, there is the service fee set aside (SFSA) – $35/month x ~10 years – which the lender will draw from every month for as long as the reverse mortgage remains outstanding. [It should be noted that for promotional/competitive purposes, some lenders will do away with the origination fee and SFSA, and potential borrowers are encouraged to shop around].
Next, the mortgage insurance premium (mip) must be paid to FHA (assuming that the loan is a Home Equity Conversion Mortgage (HECM), as opposed to a proprietary reverse mortgage; this protects the lender (and indirectly, the borrower) from the possibility that the property could one day be worth less than the mortgage balance. With an HECM Standard, the borrower is charged an upfront mortgage premium of 2% of the loan value, whereas the upfront insurance premium for an HECM Saver is basically nil. Borrowers must also pay an annual insurance premium of 1.25% for as long as the reverse mortgage remains outstanding.
The largest (cumulative) cost for all borrowers is interest. Interest is assessed monthly, whether the interest rate is fixed or variable. Since reverse mortgages are always negatively amortizing, the interest is added on the loan balance, and compounds exponentially over the life of the mortgage. If the value of your home doesn’t appreciate at a rate similar to your reverse mortgage rate of interest, then your home equity will steadily erode to the point that it could become negative. If you have aspirations of repaying your reverse mortgage before this point (or even if you don’t!), it’s important to stay abreast of the situation.
Technically, there aren’t any other costs associated with the reverse mortgage. For example, lender consultations and loan counseling are always available free of charge. However, since there is no escrow account associated with the reverse mortgage (unlike with a conventional mortgage), it is imperative that you continue to pay property taxes and hazard insurance premiums, as well as to spend money maintaining the property for as long as you continue to live there. Failure to do so represents a breach of the loan agreement and could trigger termination of the reverse mortgage.
2 Responses to “Summary of Reverse Mortgage Costs”
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December 30th, 2010 at 10:17 am
In my state the broker that came to my house represented he was part of the bank. This lack of disclosure about his relationship with the bank still goes on. This is important to me since the inspector he had come to my home did not conduct an inspection (as I learned) that represented the condition of my home. When I asked about this the broker said “HUD has different standards for Conversion mortgages” so the inspection “is not as stringent.” “You already own your home” so that is the difference. The ramifications of this are very serious. The house needed a real FHA involvement to make sure that the contractors fixed the house and I used my equity to fix the house. I was told that I could have a reassessment after the house was fixed and increase its value. Now the broker says I misunderstood and that the only way to do that is a new loan. I spent $14K of my equity on this loan. He is now listed as being with the Bank that took this mortgage from defunct Countrywide. And the broker told me that the Countrywide he represented was “a different bank” then the one in the news. I know what I would do differently should I ever get another inspection or mortgage and of course, no matter how nice the broker, an attorney is worth the expense to see what you are signing. The new bank is terrible and I would never ask them to help me. Senior Citizens need to be able to deal with a bank officer in their town that knows about reverse mortgages. They need to be able to get answers and a man who comes to your home to do business is probably not the best person to trust.
April 29th, 2012 at 11:12 am
You shortened my comments which is o.k. but it is important to note that I got an “appraisal” and not an inspection and that the appraiser said the client was Countrywide and Landsafe. So he was not affiliated with them?? And the broker that said the bank sent him, according to Bank of America 3 weeks ago, was their employee in 2007. I did not get my loan until August of 2008! The real problem that I see here is what the point of the broker’s story. No set-aside so although y 1926 house needed repairs, without the FHA appraiser/inspector actually doing the due diligence, it is not clear my house would even have qualified for this loan. The broker never let me know this. Further, they valued my house generously and obviously that has something to do with what has happened. I fixed my house with my equity but the contract I signed (huge document not presented before the closing as is required by HUD for home buyers so they can read what they sign) — it was finally apparent that my house was considered in good condition and that if I did not keep it in good condition, I would not have a home. Something is wrong with this picture. Somehow a man working for Bank of America, removed that name from the equation even when I asked about it and meanwhile, evidently, was working for Bank of America. The Appraiser did not look at the roof, the electic, the plumbing — all he had to do was go into the basement and he would be able to see the situation. Then he said all was fine because he saw nothing wrong. Well, a blind man could have come here and made the same statement — what you cannot see, you cannot report.
Is this deceptive?