The Truth About Reverse Mortgage Loan Costs

If you have been looking into getting a reverse mortgage, then undoubtedly you have heard that one of the negatives repeatedly cited is that the costs are high. On the surface this seems to be a true statement. However, if you start dissecting the costs of a reverse mortgage and compare those costs to alternatives like selling your home and moving, you may find that the costs are only high if you have other assets or sources of income to access other than your home. If you truly need a reverse mortgage in order to make ends meet or for other financial reasons, then you may realize that the costs are not too high given your particular circumstances.

Lets take a closer look at what the real costs of a reverse mortgage are and what these costs pay for.

The majority of reverse mortgage loans that have closed in the United States to date, have been the FHA insured HECM (Home Equity Conversion Mortgage.) Because these loans are insured by FHA and backed by HUD they are considered to be the safest reverse mortgage loans available and usually offer the most benefits and more choices of how you can elect to receive your loan proceeds.

The guarantees that you receive with the FHA insured HECM reverse mortgage loan are:

1. Under the tenure option you will continue to receive your monthly payments from your reverse mortgage as long as you live in your home. That means that even if you outlive your life expectancy and your house is not worth as much as your reverse mortgage has paid you, you will continue to receive those payments, until you permanently leave your home. Guaranteed!

2. Your heirs or your estate will NEVER owe more on the loan than the value of your home at the time the loan is repaid. Reverse Mortgage loans are non-recourse loans. The lender can never come back to your estate or your heirs if there is a shortfall at the time of repayment.

3. Additionally, if the lender should happen to go out of business, the FHA insurance guarantees that you will continue to receive your monthly payments or have access to your credit line in accordance with the terms of your original loan agreement.

If the FHA mortgage insurance was not available, you can be sure that there would be very few lenders willing to make reverse mortgage loans with the favorable terms that are offered to seniors today.

The cost of the FHA insurance premium is 2% of the loan amount. The insurance premium along with other closing costs are rolled into the loan. They are not upfront out of pocket expenses, they are simply paid by you or your estate at the time the loan is repaid.

Loan Servicing Fee:

A monthly loan servicing fee of up to $35.00 per month is charged to the borrower as part of the overall closing costs. All lenders charge a loan servicing fee. However, on a forward mortgage the loan servicing fee is incorporated into the interest rate on the loan, so the borrower often times isn’t even aware of it.

On a Reverse mortgage the servicing fee is set aside upfront and is calculated based upon the life expectancy of the youngest borrower. The lender receives the servicing fee each month as long as the loan is in force. If the borrower leaves the home permanently before the servicing set aside is exhausted, the balance remaining is distributed to the borrower or the borrowers’ estate.

Loan Origination Fee:

The loan origination fee is the fee that is charged by the lender to originate, process and close your reverse mortgage loan application. FHA caps the loan origination fee at 2% of the value of the house or the maximum FHA loan limit for your geographical area, whichever is less. FHA also states that the origination fee in any case is not to be less than $2000. (At the time of this writing, Congress and HUD are discussing changes to this mandate.) Some lenders have been known to negotiate the loan origination fee to compete for business.

The three fees mentioned above make up the lions’ share of the closing costs for a reverse mortgage. In addition to these three, you will have costs that you are familiar with from previous mortgages that you have had. They are fees such as, appraisal, credit report, flood certification, courier, recording, document preparation, pest inspection, closing or escrow fee, title insurance, survey. (This may or may not be a complete list, depending on your area of the country.)

So Are The Costs Really Too High? – You Decide

It is best to view the costs in comparison to the value that you will receive from the benefits of getting a reverse mortgage. You must evaluate the costs compared to the improvement in your lifestyle, your increased monthly income, and the fact that you are not burdening your children at this time in your life. Personally you will not feel the impact of the closing costs. They are simply a cost from your estate at the time your house is sold or refinanced and the loan is paid off. It is foolhardy to reject the idea of getting a reverse mortgage based strictly on the cost of this valuable financial planning tool.

After all, if you considered one of the obvious alternatives, which would be to sell your home, you would be looking at paying 6% in real estate commissions as well as typical sellers’ closing costs and possibly some costly home

repairs. You would then have relocation costs for yourself which could include a down payment of 5% – 20% for another home, moving expenses of $5,000. or more and closing costs of 2% – 3% for a new mortgage. As you can see the cost of selling your home far outweighs the cost of obtaining a reverse mortgage.

A Word of Caution:

Now that you know that the costs for a reverse mortgage do tend to be higher than the costs of a traditional forward mortgage, hopefully you also have an appreciation for why they are high. That being said, you probably are not a candidate for a reverse mortgage if you anticipate permanently leaving your home in less than five years. Five years seems to be the consensus among industry experts, to be the critical time frame to remain in your home to make the costs worthwhile. If you feel you will leave your home sooner than five years, you should consider alternative options, such as a cash out refinance or a home equity loan to tide you over until you sell or move out of your home.

Fixed Versus Adjustable Mortgage Rates

Buying a home is one of the biggest decisions most people make in their lifetime. It is a huge investment and for many the idea of committing to a mortgage (one that could last up to 30 years to pay off) is a stressful experience. When buying a first home there are many factors to consider. What type of house do you want? How much can you afford? Will you be able to build equity in the current housing market? However, one of the biggest challenges for many new home buyers is understanding the various mortgage options and how the constantly fluctuating interest rates can affect them. Here’s how to understand the difference between fixed rate mortgages and adjustable rate mortgages.

Fixed Rate Mortgages
Fixed rate mortgages offer the buyer a consistent rate for the period assigned to the mortgage. For example, if you lock in at a 30 year mortgage your rate will not increase for the life of your loan. The benefit of this type of mortgage is that it makes it easier for the borrower to budget monthly expenses because payments remain the same every month. These types of mortgages are easy to understand for the new home buyer and are good for borrowers who are at the upper end of their budget and can’t afford any surprises. Fixed rate mortgages are also good for home buyers that plan to stay in their home for the duration of their mortgage. However, fixed rate mortgages don’t protect buyers if home values drop. In this scenario payments can become overvalued as equity falls behind.

Adjustable Rate (ARM) Mortgages
In comparison, monthly payments of adjustable rate mortgages go up and down each time the rate resets. Adjustable rate mortgages reflect short-term rates and are usually lower than the longer term mortgages. ARMs allow home buyers to purchase a larger more expensive home because interest rates are lower. The lower monthly payments are good for borrowers who want to take advantage of lower rates but have room in their budget if rates increase. However, many ARM loans begin with teaser rates that are below the indexed rate and in the long term may increase as rates reset to a market rate.

Let’s look at an example. Monthly payments on a $400,000 loan for a 30 year fixed rate mortgage at 4.31 percent would be $1981.84 compared to a 1 year adjustable rate mortgage at 3.00 percent, which would be $1686.00 resulting in a savings of approximately $300 per month.

Most first time home buyers rush into the housing market when rates are low without really understanding what they are getting into. Mortgage rates are important but borrowers have to consider the overall cost of home ownership including things such as the amortizaton period, payment options, and how the different types of mortgages can effect payments over time.

Often many people think that taking on a longer mortgage keeps repayments low. However, there is significantly less total interest repayable on a 15 year term than a 30 year mortgage.

Buying a first home can be exciting but it is also very scary. Especially for first time buyers who don’t have a clear understanding of interest rates and various mortgage products. Although there is a lot of stress that comes with purchasing a first home, it is a great investment and one that you will rarely regret as long as you ensure you know what you are getting into.

The ABC’s of Getting a Home Mortgage Loan

Conventional wisdom has it that there could not be a better time to capitalize on attractive low mortgage interest rates and rock bottom real estate market prices. That being said, here are some very important steps to consider for those in the market to purchase a new home. The first and foremost consideration is to determine whether you are, in fact, in the financial position to buy a home. It is therefore a good idea to check your credit report and FICO (Fair Isaac Corporation) score beforehand to see if you have the creditworthiness to move forward in purchasing a home.Credit Report and Scoring

Your FICO score is a complex credit-scoring formula that assesses the risk that a borrower may default on a loan. It is derived from the three credit reporting agencies (Experian, TransUnion, Equifax) that appear on your credit report and will be indicative of the interest rate that you will pay on your mortgage loan. The good news is that consumers are offered one free copy of their credit report per year, but the bad news is that the actual FICO scores are not included in these free reports. Thus you will still be required to pay for this scoring which is highly recommended to see exactly where you stand. At the time of this proactive investigation you may want to “clean up” your credit to assist in accelerating your FICO score to facilitate getting the best deal on your home mortgage loan.

In general, FICO scores at 640 or better are considered candidates for prime-rate loans, while those under 640 are considered high risk. To get top-tier mortgage rates a borrower needs to have a FICO of at least 740. When you decide to move forward in buying a home your mortgage broker or lender will order an updated credit report to get your FICO, in addition to having you fully document your income, assets and liabilities. This process will serve to “pre-qualify” you for a home mortgage loan.

Lenders will look at this information and determine the amount of debt you can reasonably handle given your income, employment history, and credit history. Based on their perception of this information, as well as specific underwriting policies, lenders may extend credit to you although your FICO score is low, or may even decline your request for credit although your score is high. In the unfortunate event that you are declined by a particular lender you may want to shop around.

Choosing a Mortgage Professional

There are several options available to you in wisely choosing who will assist you in obtaining the best mortgage rate and loan product on the market. Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many types of direct lenders you can choose from such as: banks, savings associations, mortgage companies and credit unions. You may decide to work with either a mortgage broker or one of these direct lending sources. Although as mentioned, being declined by a direct lender could surely become a determining factor in the need to shop around.

Comparison shopping is tantamount to the process of getting a home mortgage loan and a mortgage broker can indeed be instrumental in serving as a trusted partner to help you find the loan that meets your needs. Think about it; a mortgage broker deals only in mortgages and therefore has access to more loans than direct lenders and this can certainly be a critical factor in making the right choices. The individualized attention and flexibility of a mortgage broker is superior to a direct lender because interest rates change on a daily basis. Consequently, a broker can start a loan with one lender and swiftly switch gears to another lender if the rates are better!

By all means be sure that your mortgage professional guarantees your rate with a “rate lock” of a stated interest rate for a specific period of time, usually 30 days. This ensures that even if interest rates rise you will still receive the “locked” rate.

Types of Mortgage Loans

For borrowers that may be unable to meet today’s strict lending requirements, FHA (Federal Housing Administration) backed loans are an alternative. These loans require a minimum down payment of 3.5 percent however borrowers will pay an insurance premium for Private Mortgage Insurance (PMI) as well as a slightly higher interest rate. The down payment required with loans other than FHA may vary according to the market, borrower and property type.

There are both fixed and adjustable rate mortgages available to borrowers and your mortgage professional will explain and advise which may be suitable for you. They will further discuss with you the associated costs that may include broker origination fee, processing and application fees, points, pre-paid items and title charges.

All lenders are required by federal law to provide a Good Faith Estimate of the costs of your loan and a Truth-In-Lending Disclosure within three days of receiving your loan application. Read this carefully with your broker to clearly understand what goes toward principal and interest as well as the cost of mortgage insurance and property taxes to know exactly how much your monthly payment will be.

Here are the ABC’s to getting a home mortgage loan:

a) Be pro-active; check your credit report and work on improving FICO if necessary.
b) Choose your mortgage broker or direct lender wisely to shop the best deal.
c) Your mortgage broker will thoroughly research and shop loans and rates, disclosing mortgage payment and associated costs with you.
d) You will then decide which loan is best for you. Do not forget to lock in your rate!

The American Dream

It is still an integral part of the American Dream to own a home and the truth is; we may never again see the low interest rates and real estate prices that are reflected in our present economy. Buying a home can be a significant investment opportunity and one of the most important decisions you will ever make. Conclusively, it pays to be wise in choosing a trusted mortgage professional who will partner with you in shopping around to find the right home mortgage loan that will reflect your dreams as well as realistic financial goals.