How Much Does a Reverse Mortgage Cost?
By JLP | February 13, 2008
I just did a hypothetical reverse mortgage calculation using this calculator. For the calculation I used a birthdate for the husband of January 1, 1945 and June 25, 1945 for the wife. I also assumed the house was worth $200,000 and that there were no other loans on the property. Here’s the quote I got:
This note was attached to the bottom of the results:
These estimates are based on current HECM interest rates, maximum origination and servicing fees, and an approximate national average closing cost total. Interest rates are current for the week of February 12th. Actual loan amounts available depend on the rates in effect when a loan is closed, and the actual origination fee and closing costs charged. They also depend on the appraised value of your home and current equity limits in each program. These estimates reflect Fannie Mae’s current equity limit and the HUD equity limits as of February 10, which are subject to change during the year.
About two-thirds of the way down you’ll see the breakdown of the fees. According to these numbers, the fees would run you over $16,341 or 8.1% of the value of the house, which seems to be high compared to the 6% – 7% range I have been reading about in various articles. I’m also not quite sure why they must charge for mortgage insurance since the homeowner is not allowed to borrow anywhere close to the 80% mark that usually determines the need for private mortgage insurance on a standard mortgage. I’m also not sure why there has to be an additional “service fee set-aside” since the lender is already getting $4,000.
One thing to note is that if you decide to take a line of credit and don’t use it all, the balance grows. Take a look at this graphic to see what I mean:
So, if the couple in this example took out a reverse mortgage for $110,259 but didn’t touch it for 5 years, they would have over $135,000 available in 5 years.
I’m trying to be fair in my analysis but I have to say that the fees seem high to me. I’m not necessarily against using this product but I think I would reserve my use for emergencies or as a last resort. I certainly wouldn’t use it to take a vacation. That just doesn’t seem prudent to me.
13 Responses to “How Much Does a Reverse Mortgage Cost?”
- John Says:
If you view the Reverse Mortgage using your traditional conventional mortgage experience it can seem confusing. Reverse Mortgage MIP is not taken for the same reasons as in conventional mortgages. It is required by the FHA and is paid directly to the FHA and not the lender. Reverse Mortgages are non-recourse loans-the borrower will never owe more than the fair market value of the home. The lender has no interest in any other asset and cannot pursue repayment by other means than the sale of the home. With that in mind, investors would be reluctant to take on an investment that has such a risky downside. This is where FHA insurance kicks in. In a scenario where the Reverse Mortgage balance is greater than the value of the home, for whatever reason-declining markets etc. the lender is covered by the FHA. With this protection, we now have capital to fund loans.
It’s important to recognize that the service set-aside is not a fee charged to the borrower. It is simply subtracted from the amount available in the principle limit.
It’s a great article mostly featuring your opinions about Reverse Mortgages. May I suggest visiting http://www.reversemortgage.org and http://www.aarp.org/money/revmort These websites should be able to answer your questions with facts.
JPG’s musing should not be taken for fact. They really belie the true nature of the reverse mortgage. John rightly points out some key features of the program.
However, the innocent comments by JPG could give one the impression that the program is not a good one.
Charles Bowman Says:
Why would you want to spend your whole life building up equity in your house only to reverse that trend later in life? If you need the equity in your house that badly, why not just sell the house? From what I’ve seen, these products are aimed at older citizens who have already retired. Selling the house would allow the owners to get ALL of the equity upfront to use as they see fit, with no fees other than possible Realtor fees. Sure, you no longer live in that home, but most people that age can no longer get around in the house as well (especially up and down stairs). Even if mobility hasn’t decreased, people who are at retirement age never need as large of a house as they did when they were younger. (No kids in the house anymore, for starters. Also, bigger house = more to clean.)
That said, how do these products compare to selling the house (and getting full equity) and either:
b. buying a smaller house
and then investing/using the remaining equity?
This is a comment from Corey at ForwardbyReverse.com. For some reason he can’t post comments on this blog.
Allow me to respond to your good questions. Selling the home is always an option a senior has. I don’t think anyone would tell you otherwise. The reason most seniors choose a reverse mortgage over selling is because they would rather remain in their home. They have an emotional investment in it, even more than a financial one. In every corner of the home, there is a memory. They are not necessarily looking for the best business decision, but the best personal decision.
Your scenario about a home being too big or too many levels is not always true. Sure, it can be. But believe me, a senior of sound mind knows their limitations. If they can’t navigate their home, they will move.
Remember, anyone who is “pro” reverse mortgage only talks about it as an option. At least, that should be their approach. Seniors should be aware of all their options. Not just the ones which make sense to you. Even if it’s not right for you, it’s a godsend to more and more people every single year. You should be glad it exists, even if you never need one yourself.
While the service set-aside may not be charged up front, I believe it is billed as part of the monthly payment to handle the adjustable interest rate calculations and loan processing.
Also, though your credit line goes up, so should the value of your home (at least in normal times).
THe service set-aside covers the monthly serivice fee for a set period. This fee is usually $30-$35 per month. Since it is a Senior Loan, all fees are disclosed and broken out. A traditional loan has servicing fees, but they are added to the interest rate. Not so with a Reverse Mortgage. This money goes into an escrow account and is subtracted each month to pay the servicing company. If the senior sells, any funds left are refunded.
The mortgage insurance also protects the heirs and estate of the senior, as well as the bank. On a traditional mortgage, when the last survivor on the loan dies, the note is due. If there is a balance, it becomes a debt to the estate. Not so with a Reverse Mortgage. The non recourse feature prohibits the lender from coming after the estate.
Keith Howell Says:
None of these sites seem to address the costs I am looking for.
1. I would like a reverse mortgage based on how much I owe the current lender, not how much I can borrow.
2. If I chose to sell the house after x years, how much would I need to repay the lender. Obviously the initial amount plus, presumably, $y for every month the reverse mortgage was in effect. But what is y?
Reverse Mortages are wrong, wrong, just plain oh wrong. People who sale reverse mortages to our senior citizens are fleeing them and it’s a crime shame. Why would you encourage senior citizens to put their paid for home or near paid for home at risk, then sugar coat it. God have mercy on you.
I might have my mother do this as she is being sued for huge credit card debt. So I see the reverse mortgage as being possibly the lesser of 2 evils – allow the creditor to take the home in a judgment amount that grows until the home is sold OR get a reverse mortgage and pay the creditors off for peace of mind. The home equity is lost either way, but I don’t want the predatory lenders to get everything!
As H L Mencken said “For every complex problem there is an answer that is clear, simple, and wrong.”
My house is paid for.
I have nobody to whom I want to give it.
My retirement income has been dramatically reduced by the current market downturn.
I can get some additional monthly income by using a reverse mortgage. Said monthly income will improve the quality of my life.
What is wrong with my reasoning?
Where am I being fleeced?
Where is the crime in my case?
You can also grow your equity should your home appreciate in value which is likely as the market turns around. When the house is sold, you must pay the revese balance but you get to keep the equity ovwer that amount.It actually cam work in your favor with interest rates where they are today, around 5.5%.
Keith in number 8 above asks if one should decide to pay back the reverse mortgage loan in a few years what will be owed? That is my question too. After the initial up front fees what are the on going monthly of annual fees? I under stand there is the monthly $30 to $35 service fee, but what else? I assume the what else includes some interest, in what typical range? Anything else?