Older homeowners often struggle financially. Rather than taking out a home equity loan, they can use the reverse mortgage. This loan still uses the equity in the home. It’s not your standard home equity loan, though. This loan gives homeowners access to their equity, but they don’t have to repay it right away. Instead, you repay the loan when you sell the home or pass away, whichever comes first. Before you take out a reverse mortgage, though, you should know the fees involved.
Just like a standard mortgage, you may pay an origination fee for your reverse mortgage. The amount you pay depends on the loan amount. The first benchmark is:
- The greater of $2,500 or 2% of the initial $200,000 appraised value
Any amount over $200,000 that you borrow will incur an additional 1% fee. The maximum origination fee is 6% of the loan amount, though.
Upfront Mortgage Insurance Premium
The upfront mortgage insurance premium works just like a regular FHA loan. The FHA charges the fee at the closing. The amount you pay depends on the way you receive your money. The fee ranges between 0.5 and 2.5%.
If you don’t take more than 60% of the full amount available at the initial disbursement, you pay 0.5% in upfront MIP. If you take more than 60%, you will pay 2.5% of the loan amount in MIP.
Just like any other loan, you need an appraisal for a reverse mortgage. This lets the lender know how much your home is worth and how much equity you have. The amount you pay depends on the appraiser chosen. Many lenders allow you to shop around for the right appraiser. Regardless of who you use, plan to pay between $300 and $500 for this service. You usually must pay for it at the time of service, not at the closing.
HUD requires recipients of the reverse mortgage to undergo mandatory counseling. The counseling is a chance to make sure you understand the reverse mortgage process. The counselor ensures that you know the fees involved and the consequences of taking the money out now. This 3rd party counseling usually costs borrowers around $125.
Miscellaneous Closing Costs
You’ll also be responsible for paying miscellaneous closing costs. You can shop around with different lenders to see who offers the lowest costs. You’ll want to ask about fees like:
- Credit report
- Title search
- Title insurance
Each lender may have different fees. Some lenders may allow you to shop for a title company as well. You must ask the lender if this is allowed before starting the loan, though.
In addition to the one-time fees you’ll pay at the closing, there are ongoing fees associated with the reverse mortgage.
Annual Mortgage Insurance
Because the reverse mortgage is an FHA loan, the first fee you’ll pay is the annual mortgage insurance. Right now, this amount equals 1.25% of the principal balance. Because you may take more money out as time goes on, your fee may increase over time.
Lenders often charge servicing fees to service your reverse mortgage. The amount you pay depends on the type of loan. The frequency of your interest rate adjustments determine what you pay:
- Annual adjusting rates cost $30per month
- Monthly adjusting rates cost $35 per month
The lender usually takes the money from your available funds in order to pay the fee.
Proving You Can Pay your Real Estates Taxes and Insurance
Another cost not associated with your mortgage, but a key part of it is your taxes and insurance. You must prove to the lender that you can afford these fees moving forward. You can’t use the funds from the mortgage to pay these costs, either. You must show you have the funds to handle them on a timely basis on your own.
The reverse mortgage may be a great opportunity for you to get the cash you need. Before you sign on the dotted line, make sure you understand what you are getting. Talk to the lender about the associated costs. Compare those costs to a few other lenders’ estimates as well. This way you know what is fair and what is not necessary.
Every reverse mortgage will have fees, but you can minimize them to make the most of your money. Talk to several lenders before making your decision today!