A reverse mortgage loan is a type of home loan that allows eligible seniors 62 and above to tap into their home equity and take it out as a cash. It differs from a cash-out refinance because instead of paying the lender a monthly mortgage sum, it is the lender that dispenses money throughout the life of the loan, or via a lump sum (or through a combination of line of credit and cash payments). The loan is only repaid and considered due once the borrower decides to sell the home, move into another residence, or passes away.
Reverse mortgages usually cost higher than your standard forward mortgages. These fees account for the origination fee, the loan servicing fee, the mortgage insurance premium, as well as the third party closing costs, etc.
Let’s look at these costs in detail.
HECM Counseling Fee
An amount of around $125 is to be paid for a mandatory counseling with a third party HECM counselor who is duly approved by the HUD. In this counseling session, the borrower is to learn how the lending process works, what are its advantages and disadvantages, and what are the requirements needed for application and approval. You cannot roll this cost on the loan.
Appraisal costs around $300 to $500. They inspect the property’s condition and from the results of the inspection, determine if the property is eligible for the loan. The cost cannot be wrapped into the loan, but must be paid to the company who conducts the appraisal.
Loan Origination Fee
Considered one of the biggest barriers to getting a reverse mortgage in the past, the cost of origination is now fortunately capped at $6,000 to prevent lenders from charging hefty amounts on origination. Typically, origination costs at least 2 percent of the first $200,000 of the property and another percent of the amount that exceeds the 200k bar.
Initial Mortgage Insurance Premium
How you prefer to get your payments will affect how much you pay for the initial mortgage insurance premium. Lenders quote it to be around 0.5 percent to 2.5 percent of the loan.
Third Party Closing Costs
These costs may vary but will definitely be present in your closing dues. These may take the form of fees for pulling your credit, recording the loan, getting a title insurance, among others.
The above-mentioned are the upfront fees that you need to pay at closing. Below are the costs that you will have to continually pay throughout the life of the loan. Remember, it is necessary for you to keep the payments ongoing and on time, else your loan may be declared due prematurely and catch you by surprise.
Annual mortgage insurance premium
The cost of your MIP is around 1.25 percent of your outstanding loan balance. These can be rolled into the loan and will accrue interest throughout its term.
Loan servicing fees
If your reverse mortgage adjusts periodically, a certain servicing amount may be charged by the lender to accordingly adjust your payments with the shifts. This cost can be added into your loan payments, depending on how often the change happens.
Long-term property costs
These include your homeowners’s insurance premium, taxes, other property insurance fees, etc. Your lenders might require you to present a proof of reserves or income which will assure them that you will able to shoulder these payments in the future. Failure to do so will likely result in the denial of your loan application.
If you are looking into the possibility of getting a reverse mortgage and evaluating it against your retirement plans, you may want to peek at what the FHA’s reverse mortgage program, the Home Equity Conversion Mortgage or HECM has in store for you.
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