As with any financial transaction the Reverse Mortgage has costs associated with it and many borrowers do not fully understand them. In an effort to increase awareness and the knowledge of our borrowers we want to take a moment to address these costs and clarify what they are, who they’re paid to, and why the borrower pays them.
There are 4 main “Costs” associated with doing a Reverse Mortgage loan; Upfront MIP (Mortgage Insurance Premium), the Origination Fee, the Servicing Fee, and the “Other Costs.”
The largest cost of the Reverse Mortgage is the Upfront MIP that is paid to FHA, by the client, for insurance on the loan. This insurance is required by FHA and is in place to cover the borrower from every owing more than their home is worth. This makes this loan a “Non-Recourse” loan. If in the future the balance of the loan exceeds the value of the property this insurance policy protects the client and insures that they will not have to cover that shortage out of pocket.
The next cost of the loan is the Origination Fee. This is the amount of money that is paid by the borrower to the lender for originating and processing their Reverse Mortgage Loan. This fee is calculated by taking 2% of the first $200,000 in home value and adding to it 1% of anything greater than $200,000. The fee is capped at $6,500 and cannot exceed that amount regardless of what the home value is. The fee also has a floor amount of $2,500 regardless of how low the home value is.
The servicing fee on the Reverse Mortgage loan is typically $35 per month and is used to pay for the ongoing maintenance of the loan after it has been closed. While many people think of this as a “Cost” of doing the loan the reality is that this is simply an amount that is set aside from the total amount available to the client. From this “Set Aside” amount the monthly servicing fee is paid to the loan servicer and the client is only ever changed the actual amount of money used for the term of their loan. When the loan becomes due and payable the remaining amount of the “Set Aside” is credited back to the clients equity in their home.
The last cost of the Reverse Mortgage are often called the “Other Costs” and includes the Tile and Escrow fees, the cost of the appraisal, and any other costs of doing business on the loan. These costs are fairly standard across the board and don’t really change much from lender to lender. The best part about the “Other Costs” section of the closing costs is that because this is an FHA loan there are no “Junk Fees” associated with a Reverse Mortgage. What does this mean to you? It means that every closing cost with this loan is legitimate and not a lender created fee to pull more money from the client.
Overall the costs of the Reverse Mortgage loan are typically going to be higher than a conventional mortgage loan, there’s no denying that. However, the benefit of never making another mortgage payment, having the security of never having to leave the home you know and love, and being able to spend some of the equity in your property to increase the quality of your life, are truly priceless.