Designed to facilitate cash-crunched senior above 62 years of age who own have repaid almost or the entire amount of their mortgage loan, the reverse mortgage can be used to convert the equity built in their home into cash, helping them to manage their liquidity crisis during the retirement life.
One of the distinctive features of a reverse mortgage is that the interest is not paid up-front or monthly, and can be deferred until the end of the loan’s duration or maturity. Some of the main events that can trigger the loan’s maturity include:
- The Sale of the property
- The borrowers moving out of the estate for good
- The total taxes and insurance evaded by the borrowers overwhelm the loan amount
- The demise of the borrower and all the co-borrowers
However, when compared to the reverse mortgage fees, the interest rates are not always easy to comprehend. The interest rate on this mortgage can be computed daily and added to the balance on a monthly basis, which the borrowers can find on their monthly statement. Usually on a higher side, as compared to the traditional mortgages, the rates can differ on various factors such as the borrowed amount, the procedure to withdraw the proceeds, the borrower’s credit profile and even the estate’s appraised value.
Apart from the higher rates, even higher cost is one of the typical characteristics of a Reverse Mortgage that includes both initial and annual insurance premiums, loan origination and servicing along with the third-party fees for closing costs.
Before assessing the costs of the RM and comparing it to other retirement strategies, borrowers need to thoroughly understand the Home Equity Conversion Mortgages (HECMs), which account for almost all RMs in the country. Popularly known as the federally-insured RM, the HECMs are insured by the Federal Housing Administration, and typically entail two types of costs – upfront and over time. The costs depend on the amount the borrowers take out, and also on the lender. These costs are discussed below in detail.
- Appraisal fee: Charged by the appraisal management company, the professional service involves the evaluation of the estate’s value, and is an upfront cost required to be paid when applying for a reverse mortgage.
- Counseling Fee: The applicants are required to attend a mandatory counseling that briefs them about the process, eligibility requirements, drawback and the benefits of the RM. The HECM counselor is approved by the Department of Housing and Urban Development and can charge around $125 as per Consumer Financial Protection Bureau.
- Fee for origination: Charged by the lender, the loan origination fee is the compensation for putting a new loan in place, and can cost around 1% of the loan amount.
- Initial mortgage insurance premium: The IMIP is an insurance against the value of the loan and protects both the lender and borrower when the RM becomes due and payable, and the value of the real estate isn’t enough to settle the entire loan balance.
These costs are rolled up into the loan amount and can be paid as part of the monthly payments.
- Mortgage insurance premiums: The FHA premium which operates as collateral for the loan advances received by the borrowers, can be rolled into the loan amount but will accrue interest for the duration of the loan.
- Servicing fees: If the interest rate adjusts annually or monthly, then it would attract a monthly fee of about $30-35. It can be added into the interest rate by the lender, which can increase the monthly loan balance.
Even amidst these substantial costs associated with it, the reverse mortgage is now turning into a preferred choice of income for senior citizens planning their retirement. The opportunity to tap into the estate’s equity while living in the house for years to come can be beneficial for many. Moreover, they are no monthly mortgage payments, and just being regular with the insurance and taxes is all that is needed.
- Senior citizens who have reached the end of their current mortgage loan can benefit from the reverse mortgage.
- One of the distinctive features of this loan is that the interest is not paid up-front or monthly, and can be deferred to the end of the loan’s duration or maturity.
- Before comparing it to other retirement strategies, it’s important for borrowers to understand the cost associated with it.
- Typically there are two types of costs – upfront and over time and can depend on the various factors.