A reverse mortgage is a special type of home loan that allows homeowners aged 62 and over who have paid off all or most of their mortgage to withdraw some of their home equity and convert it to cash. .
When evaluating the costs of a reverse mortgage In relation to other potential retirement strategies, you will especially want to consider home equity conversion mortgages, or HECMs. HECMs represent almost all reverse mortgages in the United States and are insured by the Federal Housing Administration.
Reverse mortgages differ from other types of home equity loans in several ways, including higher costs. The fees will include mortgage insurance premiums, both initial and annual; third party costs for closing costs; loan origination fees, capped at $ 6,000; and loan service fees.
It should also be noted that the reverse mortgage rates tend to be higher than traditional home loans and vary depending on how much you borrow, how you withdraw your funds, the appraised value of the home, and your credit profile, among other factors.
To get to the bottom of the costs of reverse mortgages, we asked two experts to comment: Dan Hultquist, co-chair of the National Reverse Mortgage Lenders Association training committee, and Paul Fiore, executive vice-president of personal loans at American Advisors Group. .
Here are their views on HECM fees, broken down by upfront and ongoing costs:
Refundable HECM consultation fees: To obtain a reverse mortgage, borrowers must complete a mandatory consultation with a third-party HECM advisor approved by the US Department of Housing and Urban Development. The fees are typically around $ 125, according to the Consumer Financial Protection Bureau. The advice covers the lending process, pros, cons, and eligibility requirements for a reverse mortgage. These fees cannot be added to your loan and must be paid directly to the counseling agency in most cases.
Expertise fees: Professional home assessments are still required for an HECM and cost around $ 300 to $ 500, on average, Hultquist says. Appraisals can be more (or less) expensive depending on the size, age and condition of your home, he adds. These are fees that you will have to pay up front to a valuation management company.
Third-party closing costs: Expect to pay typical mortgage fees for loan registration, credit checks, title insurance, and more. Ask to see a detailed breakdown of each charge, which should be included on your lender’s closing statement, says Hultquist. Keep in mind that you can buy your own securities firm (if you don’t want to use your lender’s suggestion) to perform title research and provide title insurance.
Initial mortgage insurance premium: You will be billed an initial mortgage insurance premium at closing. The initial PIM due at closing will be 0.5% or 2.5%; the percentage is determined by how you choose to receive the proceeds of your reverse loan (line of credit against a lump sum, for example), according to HUD.
Loan origination fees: Many lenders charge loan origination fees to process, secure, and close your loan, and an HECM is no exception. Expect to pay $ 2,500 or 2% of the first $ 200,000 of your home’s appraised value (whichever is greater), says Fiore. In addition, you will pay 1% of the amount over $ 200,000. Loan origination fees were the biggest obstacle to getting a reverse mortgage in the past, but they have come down in recent years, says Fiore, and are now capped at $ 6,000. While the HECM set-up fee can be built into your loan, it still reduces your loan proceeds, he notes.
Annual mortgage loan insurance premiums: Over the life of the loan, you will pay an annual PIM which is equivalent to 1.25% of the outstanding mortgage balance, according to the HUD. You will also have to pay an FHA mortgage insurance premium, which serves as collateral to ensure you receive loan advances. You can transfer the costs of the MIP into your reverse loan, which will accumulate interest for the life of the loan.
Loan management fees: Lenders can charge a monthly service fee of up to $ 30 if your reverse mortgage has an interest rate that adjusts annually, and no more than $ 35 per month if the interest rate adjusts monthly. . When you close your reverse mortgage, your lender will deduct the management fees from your available loan funds and add them to your loan balance each month, which will increase your balance over time. Additionally, your lender may add the cost of their service charges to your interest rate, which will increase your monthly loan balance.
Long-term real estate costs: When you apply for a reverse mortgage, the FHA requires that you provide proof of sufficient income (minus your reverse mortgage proceeds) to continue paying essentials such as your home insurance premiums, property taxes. annual, homeowners association dues and risk insurance. premiums (if applicable in your region; these may be high). If you have liens on your property because you haven’t paid property taxes or HOA fees, for example, you probably won’t qualify for a reverse mortgage.
Next Steps To Getting A Reverse Mortgage
The old way of looking at reverse mortgages as a “last resort” has changed in recent years, says Fiore. You have several options to tap into the equity in your home with a reverse mortgage while living in the home for years to come.
“A lot of people could really benefit from it, but they have to find someone who knows the products,” says Fiore, adding that anyone considering a reverse mortgage should look for the NRMLA Database for a member lender to work with.
If you think a reverse mortgage might be right for you, contact a HECM advisor to register for counseling, or call HUD toll-free at 800-569-4287 to learn more. If you decide to apply for a reverse mortgage, contact a FHA Approved Lender it can help.
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