Our retirement years should ideally be spent enjoying friends and family, cultivating hobbies, and relaxing. But with many behind in retirement contributions, cash flow can be a problem for some. If you’re a homeowner, reverse mortgages may be a tool to add a little breathing room to the budget.
- Reverse mortgages can have higher fees than traditional mortgages, home equity lines of credit (HELOCs), or home loans.
- Home equity conversion mortgages (HECMs) are government-insured and require mortgage insurance premiums.
- Proprietary mortgages don’t require mortgage insurance but aren’t regulated on the amount of other fees, such as origination fees.
What Is a Reverse Mortgage?
A reverse mortgage is a financial product only available to people age 62 or older who own a home. A traditional mortgage involves borrowing money from a bank to purchase a house and paying it back in installments.
A reverse mortgage is just the opposite—a bank pays you the value of the equity of your home. You can receive the money in a variety of ways, including a lump sum or monthly installments, but the idea is the same: They are paying you for the money that you’ve already invested in your home. The loan is then paid off when you sell the home or pass away.
Reverse mortgages are complicated loans with a lot of moving parts. They also come with fees—more fees than a traditional mortgage. Understanding the fees is essential to know whether a reverse mortgage can benefit you in the long run. We’ve broken down the main fees for you, so you have a road map of what to expect.
All fees included here are applicable to a home equity conversion mortgage (HECM), which is insured by the federal government and has more stringent guidelines and caps on fees. Proprietary reverse mortgage fees can vary based on the lender and may be higher than HECMs. Single-purpose reverse mortgages are also available depending on location. These are typically the lowest-cost options but aren’t available everywhere.
Mortgage Counseling Session
Because reverse mortgages have a lot of implications for you and your heirs, the U.S. Department of Housing and Urban Development (HUD) requires every reverse mortgage applicant to participate in mortgage counseling.
This counseling session, which usually costs around $125 but could be more, goes through the pros and cons of a reverse mortgage as it applies to your unique financial situation. Since there are implications for either your heirs or spouses who may live with you but might not be on the loan, counseling ensures that you know what happens after you die or have to leave the home.
Origination fees are common on both traditional and reverse mortgages. They act as a blanket term for the cost of processing your loan. Origination fees account for the money earned by the lender to offer your loan. For HECMs, your lender may charge you 2% or $2,500, whichever is greater, of the first $200,000 of your home’s value. Past $200,000, they may charge 1% of the remaining value, but the total fee cannot exceed $6,000.
Since proprietary reverse mortgages are not insured by the federal government, there are no limits to what they can charge.
Upfront Mortgage Insurance Premium
Another stipulation of an HECM is the upfront mortgage insurance premium (UFMIP). This fee is charged at closing and equals 2% of the home’s total appraised value, not necessarily how much the reverse mortgage amount will be. For example, a home worth $600,000 would have a $12,000 UFMIP.
Ongoing Mortgage Insurance Premiums
After the reverse mortgage is issued, an additional mortgage insurance premium (MIP) of 0.5% is levied annually. This 0.5% is based on the amount borrowed. Since most HECMs will only allow homeowners to borrow up to 50% of the equity in their home, this tends to be a significantly lower amount than the up-front cost.
Together, the UFMIP and the MIP form a fund to make up the difference when the amount of a reverse mortgage exceeds the amount of equity available. Since HECMs are insured by the government, lenders can’t require homeowners or heirs to pay the difference in this situation, and this fund protects their interests and spares homeowners from ramifications.
Proprietary reverse mortgages are not required to charge either UFMIPs or MIPs, so that could potentially save borrowers money.
In addition to the UFMIP and the MIP, interest will apply to your reverse mortgage. Since the lender is paying you instead of the other way around, the interest is taken out of the equity for the home. Reverse mortgages can have either variable or fixed interest rates. For fixed-rate mortgages, lenders will often require the money to be paid out in a lump sum. Variable-rate reverse mortgages are very common, but beware: Rising interest rates can eat into your equity faster than you realize.
Since your equity is the commodity in a reverse mortgage, you must quantify the value of your home. Lenders may require an appraisal to show the current value of your home and determine your equity. Other third-party charges could include title insurance, recording fees, credit checks, and other services used to establish the basis of the loan.
Each lender also sets its own servicing fees. These fees cover things like account statements, making sure that you keep up with homeowner’s insurance and property taxes, and disbursal of funds. Service fees are based on how your interest is calculated. If the loan has a fixed interest rate or annually adjusted interest rate, they can charge up to $30 a month. For monthly variable interest rates, they can go up to $35. Those fees will, of course, be added to your loan balance rather than charged out of pocket.
Is a Proprietary Reverse Mortgage Cheaper Than a Home Equity Conversion Mortgage (HECM)?
Not necessarily. Although proprietary reverse mortgages don’t require mortgage insurance premiums (MIPs), they also don’t have any safeguards on how much they can charge for other fees like loan servicing or origination. Read the contract carefully to be sure about what is included.
Can I Access All the Equity in My Home?
Typically, reverse mortgages will let you borrow only up to 50% of the available equity in your home. This is a way to protect you from using more equity than you’ve borrowed on your reverse mortgage, although it does still happen.
What Happens at Mortgage Counseling?
Since reverse mortgages are a product for seniors, mortgage counseling explains all the possible pros and cons of the loan as they apply to their specific situation. This hopefully illuminates whether a reverse mortgage is a better choice than another plan, such as selling the house or taking out a home equity loan.
The Bottom Line
Reverse mortgages can offer a bit of breathing room for seniors with low cash flow, but fees can eat into the amount of money that they can utilize. With the exception of the counseling session, most fees can and will be rolled into the total loan amount. Look carefully at the itemized fees to make sure that a reverse mortgage is right for your situation.