Reverse Mortgage Lenders Dropping Fees

There’s a new competition among reverse mortgage lenders, and competition is something which borrowers should applaud.

“A price war is on,” says Kiplinger.com “Reverse mortgage lenders want your business, and they are putting their products on sale by cutting loan fees. While borrowers can benefit from the competition, the terms of the reduced-rate loans could make them unsuitable for some homeowners.”

The article points out that discounts on monthly servicing fees and up-front origination charges may be available for borrowers who want to get a lump-sum reverse mortgage.

Insurance Costs

However, warns Kiplinger, “if you are tantalized by ads touting the fee cuts, be careful. Even with the cuts in the servicing fee and the origination fee, a reverse mortgage can be expensive. You will still pay closing costs, such as title insurance. You’ll also pay an upfront insurance premium of 2% of the home value (or the lending limit, whichever is less), plus an annual 0.5% of the mortgage balance.”

I’m not sure this is a big issue. Here’s why:

Let’s say that you take out a $200,000 forward FHA mortgage and a $200,000 Home Equity Conversion Mortgage (HECM) — in other words, a reverse mortgage backed with FHA insurance.

In the case of the baseline FHA forward loan you will pay a 2.25 percent up-front fee plus an annual fee equal to .55 percent of the outstanding balance paid monthly. That sure sounds like more than the costs cited for a reverse mortgage — 2% up front plus .5% of the mortgage balance.

In the case of a reverse mortgage taken out as a line of credit the issue is different. The borrower is paying a fee based on the largest possible loan amount but some or much or maybe all of the money may not have been withdrawn at the time of settlement. In such a situation the real cost of the up-front fee is larger than it appears.

As well, the cost for fixed-rate financing is higher than the cost of an adjustable-rate loan — at least at first.

Is It Right?

Reverse mortgages are very different when compared with traditional, forward loans. They allow homeowners to tap frozen equity, but like all loans there are costs for such access.

If a reverse mortgage is right for you than you surely want to find the loan which represents the lowest costs in terms of fees, charges and interest. And if a reverse mortgage is not prudent in your situation, then discounts don’t matter — the product is not right for you.

The gray middle area occurs when a reverse mortgage may be a good choice if only the fees were lower. By offering reverse loans at less cost, lenders are opening up the reverse mortgage option to additional borrowers. And more choices, like more competition, is something to be encouraged.

This entry was posted on Wednesday, July 21st, 2010 at 12:24 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.