What you need to know before applying
As you may know, a reverse mortgage loan is a very special type of loan that permits borrowers to convert some of the equity in their home to cash. Instead of paying the lender, the lender pays you, the borrower. Reverse mortgages can give senior homeowners the funds they need to lead to a more secure and enjoyable retirement, repair their house, or potentially pay for long-term care and other necessary expenses, while allowing them to continue to live in their own homes for as long as they want. However, reverse mortgages may not be suitable in every circumstance.
As is the case with a traditional forward mortgage, you retain title to your home while your property is pledged to the lender as security for the loan. You remain responsible to pay taxes, insurance, and any other obligations that might create a lien on the property, as well as to maintain the property. Some or all of the cost of setting-up the loan can generally be paid with loan proceeds advanced at closing.
The amount of loan proceeds available to you depends upon a variety of factors including the appraised value of your home, your age, the cost of the loan, and regional or overall program limits set by the Federal Housing Administration or loan investors. Generally, the lower the age of the borrower (and therefore the longer the borrower’s life expectancy), the smaller the loan amount for which you may qualify. As you might expect, the higher the home value, generally the higher the loan amount for which you may qualify. Finally, the higher the interest rate and the costs and fees associated with originating the loan, the lower the loan amount.
How Repayment Works
Over time, the loan balance of a reverse mortgage will rise. It grows because the borrower may continue to receive loan advances and is being charged interest on the outstanding loan balance while no repayment is being made until a future time. No repayment is required under a reverse mortgage as long as you, the borrower, live in the home as your principal residence. When the last surviving borrower dies, sells the home, or permanently moves away, the full loan balance becomes due and payable. Even when due, there is a limit on the amount of the borrower’s repayment obligation, known as a “non-recourse” limit means that the total amount owed by the borrower can never exceed the value of the home (after deducting the costs of sale) at the time the loan becomes due and payable.
Different Kinds of Reverse Mortgages
There are currently two basic types of multi-purpose reverse mortgages, the federally insured Home Equity Conversion Mortgage (commonly referred to as the “HECM”) which currently accounts for approximately 90% of the reverse mortgages originated in the United States, and proprietary reverse mortgages developed and sponsored by private lenders. These are “multi-purpose” reverse mortgages because you may use the loan proceeds for any purpose you wish. In addition, some state and local government agencies offer single-purpose reverse mortgages that are available for a single limited purpose, such as home repair or the payment of property taxes. If your needs are limited to these purposes, you may wish to investigate whether a state or local government agency in your area offers such a program. While these programs generally have maximum income eligibility requirements, their total cost is usually less than the multi-purpose reverse mortgage programs currently available and some programs may even forgive the principal balance of the loan after a certain period of time.
Options for getting your money
For multi-purpose reverse mortgage programs, borrowers generally may choose from among different options for receipt of their loan proceeds, and to the extent undisbursed loan proceeds remain, the payment option can be changed at any time. The following options generally are currently available in most states:
- Tenure – The borrower receives equal monthly payments from the lender as long as the home is occupied as the borrower’s principal residence
- Term – The borrower receives equal monthly payments for a period of months as selected by the borrower.
- Line of Credit – The borrower may draw loan proceeds in amounts and at times he/she chooses until the credit line is exhausted.
- Lump Sum – The borrower may draw from a Line of Credit all or any lesser amount of available loan proceeds at closing
- Modified Term – The borrower my combine a line of credit with monthly payments for a number of months selected by the borrower.
- Modified Tenure – The borrower may combine a line of credit with monthly payments as long as the home is occupied as the borrower’s principal residence.
Understanding Reverse Mortgage Costs
Many of the same costs that one pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the HECM), an appraisal fee, and certain other standard closing costs.
Generally, reverse mortgages have significant upfront closing costs. For borrowers who move out, sell their home or pass away within a few years of taking out the loan, a reverse mortgage can be an expensive option. However, the longer a reverse mortgage is in place, the lower its overall annual average cost.
In most cases, loan fees and costs are capped and may be financed as part of the reverse mortgage. Below is a more in-depth explanation of each type of fee.
Other closing costs that are commonly charged to a reverse mortgage borrower include:
The origination fee helps cover a lender’s costs and expenses for making the reverse mortgage – including office overhead.
You may pay an origination fee in an amount not exceeding the greater of: (i) $2,500, or (ii) an amount equal to two (2%) percent of the maximum claim amount of the mortgage, up to a maximum claim amount of $200,000, plus one (1%) percent of any portion of the maximum claim amount that is greater than $200,000; subject to a maximum origination fee of $6,000. The entire amount of the origination fee may be financed as part of the mortgage and so you need not pay it in cash if you would prefer not to do so.
Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to .05% for borrowers that borrow 60% or less of their principal limit or 2.5% for borrowers that borrow greater than 60% of their principal limit, plus an annual premium thereafter equal to 1.25 percent of the loan balance (the annual premium will accrue on your loan balance at a monthly rate). The MIP is paid to HUD. Among other things, HUD guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds.
An independent appraiser not affiliated with the lender is responsible for assigning a current market value to your home. Appraisal fees generally range between $100 $1,000 or more, depending upon you area and loan product or home value. In addition to placing a value on the home, an appraiser also checks for obvious major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations and investor standards require that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed satisfactorily, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50 – $150 dollars for each follow-up examination. Certain repairs may be required to be performed prior to the closing of your loan and the cost of repairs financed under the loan will be limited to 15% of the maximum claim amount.
- Credit report fee – Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: generally under $20.
- Flood certification fee – Determines whether the property is located on a federally designated flood plain. (If your property is in a flood zone you will be required to obtain flood insurance.) Cost: generally under $20
- Escrow, Settlement or Closing fee – Generally includes a title search and various other required closing services. Cost: $150-$450.
- Document preparation fee – Fee charged to prepare the final closing documents, including the mortgage note and other recordable papers. Cost: $75-$150.
- Recording fee – Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: $50-$100, depending on the county.
- Courier fee – Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: generally under $50.
- Title Insurance – Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of or liens against your property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance.