Reverse Mortgages: Significant Costs

Every valuable product comes at a cost, and reverse mortgages are not an exception. Generally, you will sacrifice up to 4% of your total home value to pay for closing costs that accompany a reverse mortgage.

Here, we examine the most significant costs you will incur on your mortgage application.

1.  Origination Cost

Mortgage financiers charge an origination fee to cater for operation costs to process your loan. Although lenders charge differently, the Federal Housing Association caps the maximum at $6,000.

A home not exceeding $125,000 attracts an origination fee of $2,500. If the home’s value exceeds $125,000, lenders charge 2% of the first $200,000. Similarly, financiers charge 1% of the total value for a home exceeding $2,000 in value.

2.  Appraisal Fee

As a requirement, you should have the property appraised before submitting a mortgage application. An appraisal determines the property’s market value, which is critical in determining how much you will receive.

The process also ensures your property is structurally sound and compliant with local safety codes. If your appraiser identifies structural defects, it is your responsibility to hire a repair contractor. Afterward, an appraiser will conduct a second check at an additional cost of $125.

Appraisal costs vary across states. On average, you’ll pay $450 for a home appraisal without a second check.

3.  Interest Rates

Like other loans, a reverse mortgage attracts an interest charge, a percentage of the loan amount borrowed.

Usually, you’ll have two options to choose from; fixed and variable rates.

A fixed rate gives a smaller loan amount but remains the same throughout the life of the loan.

On the other hand, a variable rate offers a flexible payment plan that fluctuates with time. It also comes with a lower introductory offer.

What Determines Interest Rates?

Borrowers set different rates depending on several factors. For example, if your financier borrows money from the US Department of Treasury, they rely on a financial index set by the state department. In turn, it will affect your borrowing costs.

Other factors include; your credit score, home value, interest type, and your preferred mode of mortgage disbursement.

Regardless of the rate, financiers calculate daily interest, which adds to your monthly balance. It usually reflects on the monthly statement you’ll get.

However, unlike conventional mortgages, you can defer a reverse mortgage payment until you pass away, sell the property, or move out.

4.  Reverse Mortgage Insurance

Before closing the loan application process, the Federal Housing Administration charges mortgage insurance to cover you against financial implications.

Insurance premiums cover the following:

• If your home equity is insufficient to pay the mortgage balance when you pass away, vacate, or sell the property, FHA insurance comes handy.

• If you exceed the projected life expectancy entitled to the loan, you continue accessing your monthly disbursement.

• FHA proceeds with your disbursement if your financier can no longer meet its financial obligations.

FHA, therefore, charges an upfront MIP worth 2% of the home value and an annual MIP worth 0.5% of the outstanding amount.

5.  Closing Costs

Some third-party charges form part of a reverse mortgage because of additional services required to complete the process.

Here is a rundown of the closing costs you’ll incur:

Counseling

Before receiving your loan, you must have a counseling session with an agency approved by the US Department of Housing and Urban Development. On average, it costs $125.

Settlement Closing

Settlement is a third-party service responsible for closing the loan application. Settlement closing involves retrieving public records, obtaining payoffs from lenders, and coordinating funding.

Credit Report

Financiers will review your credit history and score to determine if you qualify for a reverse mortgage. A credit bureau is responsible for retrieving all the vital credit reports required. Credit bureaus charge between $20-$50 for this service.

Recording

All loans require a recording and filing of security instruments such as Deeds of Trust at the County records’ office. On average, recording costs $400.

Document Preparation

Your mortgage financier will hire a third-party agent to prepare all the final closing documents. In addition, agents ensure the documents conform to the federal guidelines before loan approval. Document preparation charges may range between $75-$150.

Flood Certification

A flood certification ascertains whether the property is in a flood zone as marked by the Flood and Environment Management Authority. Flood certification charges may cost between $20-$30.

Other closing costs include;

• Lender Title Insurance
• Endorsements
• Notary

Reverse Mortgages: Are Closing Costs Worth Anything?

Most people focus on the cost and not potential benefit when buying a product. However, value overrides cost because it determines what benefits you derive from the product.

A reverse mortgage may consume 3%-4% of your home value but not in cash. You pay in the form of equity.

Moreover, FHA insurance protects you against outliving your home value. It also guarantees that you can occupy the house throughout your lifetime, as long as you pay property taxes and insurance.