April 2008
Fees pile up
As with other mortgages, many extra fees are tacked on to a reverse loan at the closing. First there are the usual culprits:
third-party charges for title searches and insurance, credit reports, recording documents, surveys, appraisals, couriers,
and inspections. Those costs can total $3,000 or more. The origination fee, which pays the lender for setting up the loan,
can be as high as 2 percent of the mortgage, or more than $7,000 for a maximum HUD loan and possibly double or triple that
for a jumbo loan. The lender will probably add a loan-servicing fee of $30 or so a month.
HECMs carry a significant additional cost: FHA mortgage insurance to pay the lender the difference if the value of the loan exceeds the value of the property. This is a set fee of 2 percent of either the home's appraised value or HUD's mortgage maximum for the area, if that figure is lower ($7,000 for a $362,790 mortgage) and 0.5 percent on the loan balance each year (if you withdraw $50,000 of your credit line, this would come to $250 per year). While jumbo and Fannie Mae loans do not require mortgage insurance, their interest rate tends to be higher to make up for the additional risk.
All of those fees, which are generally subtracted from the available balance and are not tax deductible, may add another $15,000 to the cost of the loan. Indeed, because of the substantial up-front costs, you should not even contemplate a reverse mortgage if there is any possibility that you may move out of your home in a few years.
Ideal candidates for reverse mortgages are homeowners in their mid-70s whose home equity is significant and greatly outweighs their remaining savings. In other words, it should be a last resort. As fast as compound interest accrues—borrowing $150,000 at 6 percent annually will eat up a total of $272,000 of your home equity in a decade—it is likely that taking out a reverse mortgage means shedding ownership of your home forever.
HECMs carry a significant additional cost: FHA mortgage insurance to pay the lender the difference if the value of the loan exceeds the value of the property. This is a set fee of 2 percent of either the home's appraised value or HUD's mortgage maximum for the area, if that figure is lower ($7,000 for a $362,790 mortgage) and 0.5 percent on the loan balance each year (if you withdraw $50,000 of your credit line, this would come to $250 per year). While jumbo and Fannie Mae loans do not require mortgage insurance, their interest rate tends to be higher to make up for the additional risk.
All of those fees, which are generally subtracted from the available balance and are not tax deductible, may add another $15,000 to the cost of the loan. Indeed, because of the substantial up-front costs, you should not even contemplate a reverse mortgage if there is any possibility that you may move out of your home in a few years.
Ideal candidates for reverse mortgages are homeowners in their mid-70s whose home equity is significant and greatly outweighs their remaining savings. In other words, it should be a last resort. As fast as compound interest accrues—borrowing $150,000 at 6 percent annually will eat up a total of $272,000 of your home equity in a decade—it is likely that taking out a reverse mortgage means shedding ownership of your home forever.
