Costs/Fees of a Reverse Mortgage

Many people are concerned about the costs associated with a Reverse Mortgage. However, if you want or need equity from your home, are not willing to relocate to a smaller home, don’t want to face regular loan payments and you are comfortable reducing the size of your estate left to your heirs, then the upfront costs of a Reverse Mortgage should not be a significant issue. Reverse Mortgage fees are generally only a disadvantage if you intend on moving out of the house in a short period of time. And while Reverse Mortgage interest rates can be high, the fees and interest are not a burden to the homeowner since they are usually financed by the Reverse Mortgage itself, with some exemptions.But, no matter how you justify them, Reverse Mortgage costs do indeed amount to a significant sum and we would make sure that you are clear about the fees before we move forward. To help explain these details we have created an example of a fairly typical Reverse Mortgage loan. This example shows the Reverse Mortgage loan amounts, charges and interest rates for a 62 year old retiree living in Delray Beach, Florida, with a $180,000 house, and a $31,500 mortgage.

How the HECM Reverse Mortgage Calculates Loan Amounts

A HUD-approved lender will determine your actual loan amount by using:

• The loan limit (also known as the lending limit) A lending limit is the maximum Reverse Mortgage loan amount that any home would qualify for.
• The value of your home – as determined by a FHA appraisal
• Prevailing interest rates
• The amount of any outstanding loans against your house
• Your age.

Until recently, the loan limit was set as low as $200,160 for certain counties – no matter the value of your home. However, on Nov. 6, 2008 the Department of Housing and Urban Development (HUD) increased the loan limit on the Home Equity Conversion Mortgage (HECM) to $417,000 in almost all areas of the country. And then the Economic Stimulus Bill passed by Congress in early 2009 increased the loan limit to $625,500. The $625,500 loan limit is in effect until Dec. 31, 2009 unless extended later in the year.The increases were designed to help seniors access more of their home equity to fund retirement expenses during this economic crisis.

Loan Amounts Available on a Typical Florida Reverse Mortgage*

* On a $180,000 house owned by a 62 year old retiree; this amount will also vary based on county and current interest rates. NOTE: If your home is of a high value for your area, then the amount of money you qualify for – your loan amount – is significantly higher now than it was last year due to lending limit increases.

The Fees Associated with a Reverse Mortgage and the Actual Amount of Money Available to the Homeowner

Now that we have an initial starting point for this Florida Reverse Mortgage, we can calculate the various fees this Reverse Mortgage sample client could expect to finance in the loan.

Reverse Mortgage Fees

The Origination Fee is the upfront fee charged by the Reverse Mortgage lender to initiate the loan. For the HECM, the origination fee is 2 percent of the maximum loan amount up to a loan amount of $200,000, and one percent thereafter. However, the origination fee can not be less than $2,500 or more than $6,000 no matter the loan amount. The entire amount of the origination fee may be financed as part of the mortgage.

Mortgage Insurance Cost:

Mortgage insurance costs are unique to the HECM product. HUD guidelines require that all HECM reverse mortgage borrowers receive Reverse Mortgage insurance, which guarantees that you will continue to receive benefits no matter what happens to your investor and ensures you will never owe more than the value of the home. The Mortgage Insurance Premium is 2 percent of home’s value with a home value cap of $417,000 plus an annual premium of 0.5 percent of the loan balance.

Third Party Closing Fees:

Third Party Closing Costs represent a number of services that may need to be undertaken before the reverse mortgage can be finalized. These can include appraisals, title searches, surveys, inspections, recording fees, local, state, and federal mortgage taxes, and credit checks. As these fees vary from place to place and by vendor; the amount quoted above is an approximate average.

Service Fee Set-Aside:

The Servicing Set-Aside is an amount of money taken out of the loan funds to cover the future costs of monthly service fees charged to the loan. Typically these fees are between $20 and $35 dollars; capped by the federal government. Unlike the other costs financed in the loan, the Servicing Set-Aside is not added to the principal of the loan initially, but on a month-by-month basis as the monthly fee is applied.

Cash Available to Borrower After Fees and Payoff of Liens

Following the deduction of the upfront fees and the payoff of the existing mortgage (a Reverse Mortgage borrower must always pay off any existing mortgages and other liens against the home), the borrower in our Florida Reverse Mortgage example is left with the following amounts available in the form of lump sum cash payment, line of credit, or the equivalent monthly payment for life.

Although you may be concerned about the fees on a Reverse Mortgage, the highest cost associated with this product is interest. The good news is that the interest payments are added on to the principal of the loan, and no payments are due until the borrower leaves the property on which the Reverse Mortgage has been placed. Best of all, the amount due on a Reverse Mortgage will never exceed the value of the property at the time the Reverse Mortgage ends.

Method of Calculating Interest Rates

Interest rates for a Reverse Mortgage float on a base of an established benchmark interest rate index and adjust periodically within maximum allowed adjustments and within interest rate caps. The table below shows how the HECM Reverse Mortgage loan program calculates interest.

Index Base Rate: The Index Base Rate is the interest rate of the publicly published financial index upon which the Fully Indexed Rate is based. These rates fluctuate over time. Each loan program uses a different indexed rate. Margin: The margin is the lenders’ profit margin above the value of the publicly published financial index. The margin for the HECM and Home Keeper™ is set by law. Periodic Rate Adjustments: Periodic Rate Adjustments refers to the periodic adjustment to the Fully Indexed rate. The adjustment period varies by product, monthly, bi-annually or annually. The adjustment amount is the difference between the Index Base Rate at the beginning of the period and the Index Base Rate at the end of the period. Interest Rate Caps: Interest Rate Caps are a preset maximum Margin used to calculate the maximum Fully Indexed Rate of the reverse mortgage loan. The loan may or may not reach this maximum depending on the change in Index Base Rate.

Interest Rates for Florida Reverse Mortgage Example

To see the interest rates that the Florida Reverse Mortgage client would be charged, we have assumed that the current baseline interest rates are as follows (these are close to the actual rates in the Fall of 2008): ·    One Year Treasury Bill (T-Bill): 1.07%

Assuming these Index Base Rates, each loan program would charge the following Fully Indexed Interest Rates.

Initial Fully Indexed Rate: This is the actual interest rate charged at the beginning of the loan, calculated by adding Index Base Rate + Margin = Fully Indexed Rate. Maximum Fully Indexed Rate: This is the maximum actual interest rate that could be charged, calculated by adding Index Base Rate + Margin + Maximum Periodic Rate Adjustments = Maximum Fully Indexed Rate. Fully Indexed Rates will likely go up and down over the life of the loan and may or may not reach the Maximum Fully Indexed Rate allowed under the program’s interest rate cap.

Interest Rate Charges for Florida Reverse Mortgage Example

If interest rates didn’t change for a year, the interest expense in the first year of the loan for each option in our Florida example would be approximately:

The maximum fully indexed interest rates and interest payments can be a considerable drawback for Reverse Mortgage borrowers. However, Reverse Mortgages have a significant advantage. Interest payments are added on to the principal of the loan (with no payments due until the borrower leaves the property) and the amount due on a Reverse Mortgage will never exceed the value of the property.

Comparing Reverse Mortgages to Home Equity Loans and More

A Reverse Home Mortgage is not the only way to cash in on your home in retirement. Other ways of getting money out of your home include:

• Downsizing
• Home Equity Loans
• Cash-out Mortgage Refinancing with either fixed rates or adjustable rates (refinancing your first mortgage)
• Second Mortgages
• Home Equity Line of Credit

The initial interest rates on most home equity loan products are slightly lower than those charged by Reverse Mortgage loan products. For example, in the spring of 2009, the current interest rates for other equity based loans were approximately:

·         5.5 percent initial fully indexed rate with a maximum fully indexed rate of 10 percent for the most popular adjustable rate mortgage refi (the 5/1 ARM refi, fixed for five years and adjustable thereafter)

·         5 percent for a thirty year fixed 1st Mortgage

·         4 percent variable for a $30,000 Home Equity Line of Credit. Typically the Index Base rate is the Prime Rate.

·         4 percent fixed rate for a $30,000 Home Equity Loan (2nd Mortgage)

While home equity interest rates can be lower than those charged on Reverse Mortgages, the primary disadvantage of home equity loans is that you will have to make loan payments and if the rate is variable, those payments can increase dramatically. This is often difficult for retirees living on a fixed income. It is also possible to default on a home equity loan and lose your home.

Comparing Downsizing to a Reverse Mortgage

In many cases downsizing can be the most economically efficient way of securing money from your home in retirement. However, the costs of moving are impossible to generalize and declining home values and a soft real estate market may make your home difficult to sell. Nonetheless, it might be worth your while to consider how much you might be able to sell your house for and how much less you could by another house for. If considering downsizing, you will also want to factor in the costs of using a realtor to sell your existing house and buy a new house and moving costs as well as the emotional attachment you have to your existing home.

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