Know in advance the typical closing costs and fees related to a reverse mortgage loan. Find professional reverse mortgage lenders.
Reverse Mortgage Closing Costs and Fees
Reverse mortgage loan costs may seem rather strange if you have ever purchased or refinanced a home using a traditional mortgage. That's one reason that HUD requires borrowers to go through counseling before getting one of their reverse mortgages. You should always ask your reverse mortgage lender to provide you with a Good Faith Estimate (GFE) and a Truth in Lending Statement (TIL) so that you can compare costs between reverse mortgage lenders.
RECURRING AND NON-RECURRING CLOSING COSTS
Closing costs can be either recurring or non-recurring. A recurring closing cost is usually a pro-ration such as interest, property taxes, homeowner's insurance, home owner's association (HOA) dues, or mortgage insurance. Recurring costs not related to the mortgage will continue as long as you own the property. Non-recurring costs are the expenses of taking out a mortgage.
THREE MOST EXPENSIVE COSTS OF A REVERSE MORTGAGE
Up front mortgage insurance, origination fee, and title insurance are the most expensive reverse mortgage closing costs.
- The up front mortgage insurance fee on a reverse mortgage is 2% of the appraised value of the property up to the HUD property value limits. Up front mortgage insurance guarantees that the homeowners will not "outlive" their reverse mortgage. It also protects the homeowner if the balance of the loan exceeds the value of the home. If the reverse mortgage lender gets into trouble or goes out of business, the FHA will take over the loan.
- The origination fee is the fee the lender earns for the professional service of making the loan. HUD limits the amount of money a lender can earn on a reverse mortgage, 2% of the first $200,000 of the property value and 1% of the second $200,000 of the property, not to exceed $6,000.
- A title insurance policy protects the lender and the homeowner from defects on the title. The rates for title insurance depends on the location and value of the property and may be negotiable.
OUT OF POCKET COSTS
Many of the costs of a reverse mortgage will be financed by the loan proceeds. Normally, the only out of pocket costs are for the appraisal of the property and the counseling required by HUD.
- Appraisals usually cost between $450-$550 or more depending on the availability of comparable sales.
- For a list of HUD approved counselors and their fees, you can go to the HUD Approved Housing Counseling Agencies List here.
OTHER CLOSING COSTS
Beside the three largest costs, up front mortgage insurance, origination fee, and title insurance, there are usually many smaller fees. For a complete list of fees, you must ask the reverse mortgage lender to provide you with a Good Faith Estimate (GFE) and a Truth In Lending (TIL) disclosure. Some of the other fees you might are typical of reverse mortgages and also a traditional mortgage.
- Credit Report
- Flood Certification usually
- County Recording
- Escrow / Settlement
- Document Preperation
- Property Inspections
- Payoff Demand
SPECIAL DISCLOSURES TO UNDERSTAND
In addition, reverse mortgages have a special disclosure. This is because with a traditional mortgage, you know what the balance will be--and as you pay it down it gets smaller until paid off. A reverse mortgage pays YOU. So the final balance depends on how long you keep the loan, what happens with interest rates, and how you choose to take your proceeds. So you will also have a disclosure called a Total Annual Loan Cost (TALC).
Unlike a conventional mortgage, the length of a reverse mortgage is generally not known when you take it out. They are designed to be repaid when the homeowner dies, moves, or sells the home. And while some reverse mortgages provide a lump sum at initiation, others provide a monthly payment to the home owner, so even the amount of principal cannot be known in advance in such cases. So part of your reverse mortgage counseling should be teaching you how to read and understand this form.
Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.