Reverse Mortgage Fees and Rates

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Are Reverse Mortgages really that good a choice?

The major concern with a Reverse Mortgage is that of high costs. There are various reasons for which people decide to take this financial step:

–         You may need to use the equity of your home;

–         You don’t want to move to a smaller house;

–         You can’t afford regular loan payments or you don’t want to make regular payments.

–         You don’t mind reducing the estate size that will be inherited from you.

The fees for a Reverse Mortgage are usually problematic when you intend to relocate in the near future. While the interest rates for Reverse Mortgages could be high, the homeowner does not suffer the burden of fees and interest since the mortgage itself pays for these. Let us illustrate these facts with the typical example of a 70-year old retiree that has a $50,000 mortgage and a $200,000 house. There are online financial tools like Reverse Mortgage Calculators that help you determine the amount of money you could receive with a Reverse Mortgage on your property.

Reverse Mortgage specifics – how to choose the right lender?

The most widely available form of Reverse Mortgage is known as HECM. This kind of loan can be used on an existing property or to purchase a new home. Borrowers may choose from loans with a variable or a fixed-interest rate.

HUD-approved lenders provide the HUD HECM programs. When working with a HUD-approved lender, you are protected by the government against abusive fees and lending limits. In fact, these expenses and limits are established by law, and the lenders must follow the Congress rules and regulations for Reverse Mortages.

How are loan amounts calculated for a HECM Reverse Mortgage?

In order to determine the actual loan amount, the HUD-approved lender will take several issues in consideration:

–  The value of the home as determined by an appraisal;

–  Your age;

–  The amount of other outstanding loans against the property;

–  Prevailing interest rates;

–  The lending limit which represents the maximum Reverse Mortgage amount that is possible to qualify for.

The HECM loan limit was set at $625,500, since 2009. It is possible for this amount to increase or decrease in the future given the fact that the HECM Reverse Mortgage program is under the administration of the Department of Housing & Urban Development.

 

A Typical Florida Reverse Mortgage * – know the loan amounts!

The following information may prove useful when trying to figure out whether to take a Reverse Mortgage or not. Let us analyze the fees and interest expenses for a typical situation.

HECM
(Variable Interest Rate)
HECM
(Fixed Interest Rate)
Maximum Loan Principal (loan principal limit): $106,000* $114,000

 

* For the typical example of a $200,000 house owned by a 70-year old retiree; variations of the amount are possible due to current interest rate and lender margin.

The Reverse Mortgage Fees and the amount of money the homeowner can get!

The next step after we have established the Reverse Mortgage starting point, is the calculation of fees for our sample homeowner. How much will our client spend with the loan?

Reverse Mortgage Fees

HECM
(Variable Interest Rate)
HECM
(Fixed Interest Rate)
Origination Fee: $4,000 $4,000
Mortgage Insurance Premium: $1,000 $5,000
Third Party Closing Costs (est): $2,298 $2,298
TOTAL FEES: $7,298 $11,298
Loan Amount After Fees: $98,702 $102,702

 

The explanations of the fees below allows you to read and understand the calculations so as to make an informed decision.

  • The Origination Fee represents the fee charged by the Reverse Mortgage lender when they originate the loan. The client has the option of financing the amount of the origination fee as included in the mortgage.
  • The Mortgage Insurance Cost is a unique feature of the HECM program. According to HUD regulations, all HECM Reverse Mortgage borrowers must have this type of insurance. It primarily serves for the client’s protection: you continue to get the benefits regardless of what happens to the lender (investor). It is also a precaution measure that prevents you from owing more than the home value at the time of the Reverse Mortgage repayment.
  • Third Party Closing Costs consist of certain services that the client needs before finalizing the Reverse Mortgage. These costs may include: title searches, recording fees, appraisals, credit checks, federal, state or local mortgage taxes, surveys and inspections. The amount provided in the table above is an estimated average since all these fees vary depending on vendor and location.

Getting rid of monthly payments – Paying Off Existing Liens

The monthly traditional payments on regular mortgages are eliminated with a Reverse Mortgage. This is its number one appeal. If there are liens against your house or another current mortgage, they have to be paid off. Where do you get the money for it? From the funds provided by the Reverse Mortgage. It is not allowed to have a regular mortgage and a Reverse Mortgage simultaneously.

During retirement, people prefer taking off the pressure of monthly mortgage payments: this allows them to budget better. In the example we have used for this review, the $50,000 mortgage is paid, and the homeowner gets a sum of money that they can use according to personal needs – depending on the type of loan selected.

HECM
(Variable Interest Rate)
HECM
(Fixed Interest Rate)
Net Principal Limit (Net balance after fees) $98,702 $102,702
Less Current Debt Payoff $50,000 $50,000
Remaining Money $48,702 $52,702

 

Borrower’s cash after paying off liens and fees

A condition for taking a Reverse Mortgage is to pay the existing debt and liens against the house. The client will pay both upfront fees and the existing mortgage from the new loan amount. The following table illustrates the amount of money (in cash or credit) that remains for the sample client case we have analyzed.

HECM
(Variable Interest Rate)
HECM
(Fixed Interest Rate)
Remaining Money After Fees and Payoff of Liens $48,702 $52,702
Less Upfront Cash $0 $11,400
Fixed-Rate Unusable Funds n/a $41,302
Less Selected Creditline $48,702 $0
Initial Creditline Growth Rate +3.919% n/a
Available In First Year $6,302 $0
Available After First Year $42,400 $0

 

How much cash and when it is available depends on the type of Reverse Mortgage loan you receive. This is a variation that you must be aware of and get information about.

Adjustable Rate. The choice of an adjustable rate Reverse Mortgage loan brings along some specific details. After the payoff of the liens, all the remaining funds must be put into a tenure or line of credit. The borrower then receives monthly payments from it.

The major plus of a credit line is that the client pays an interest only on the funds withdrawn, not on the total amount of cash. On the other hand, you earn an interest for the money in tenure. In our example, the borrower can use the $48,702 cash amount any way they choose. Nevertheless, there is a withdrawal limit of 60% of the loan principal ($6,302) for the first year of the Reverse Mortgage. The remaining amount ($42,400) with the adding interest, can be withdrawn after this first year.

For a Fixed Rate Reverse Mortgage, there are stricter limitations for access to the money. If you have decided on a fixed-rate loan, then, the withdrawal limit is 10% of the principal limit. For our example, this means $11,400 (10% of $114,000). The funds that don’t get used represent the home equity.

Monthly Payments Available to Borrower After Fees and Payoff of Liens

Only the adjustable rate loan allows the Reverse Mortgage borrower to receive monthly payments for the rest of their life. The fixed-rate type does not include this feature.

HECM
(Variable Interest Rate)
HECM
(Fixed Interest Rate)
Remaining Money After Fees and Payoff of Liens $48,702 $52,702
Monthly Lifetime Cash Payments $312 n/a

 

When you think that you need to have your expenses covered for, getting a monthly payment seems like a good option for increasing income.

Understanding  how Reverse Mortgage Interest Rates are calculated!
The interest is the highest cost of the Reverse Mortgage. If you are just worried about fees, you are missing the point. There is not all bad news: the interest rate is added to the loan principal, and the payments are not due before the borrower leaves the home that is subject to the Reverse Mortgage. Moreover, the debt will never be higher than the value of the property at the end of the Reverse Mortgage.

The interest rate method of calculation

There is a set benchmark interest rate index that serves for calculating the interest rates for a Reverse Mortgage. Adjustments of the index occur periodically within interest rate caps and within the maximum allowed adjustment.

The following explanations may shed more light on the way the HECM Reverse Mortgage loan program calculates interest.

The Index Base Rate represents the interest rate of the publicly announced and published financial index. The Fully Indexed Rate is based upon it. Rate fluctuations occur over time.

The Margin represents the financial profit that the lender makes from the loan. It consists of the amount added to the publicly published index. There is a minimum and a maximum interest margin, and the amount differs from company to company. In the available example, the margin represents an average.

The MIP Margin is the annual margin applied for any federal Mortgage Insurance. This is specific to all HECM Reverse Mortgages and it adds up to the upfront fee. The margin has been set at 1.25% as of February 2013.

Periodic Rate Adjustments are applied only to the adjustable rate Reverse Mortgage programs. They refer to the adjustments or modifications of the Fully Indexed rate, which occur periodically.

Interest Rate Caps refer to the maximum amount that can be charged as a present margin. These caps are used for calculating the maximum Fully Indexed Rate of the Reverse Mortgage loan. Depending on the modifications of the Index Base Rate, the loan may or may not get to this maximum.

The Initial Fully Indexed Rate is the actual interest rate that you are being charged after loan origination. It is determined by adding Index Base Rate (IBR) with the Margin (M):

Index Base Rate + Margin  = Fully Indexed Rate

The Maximum Fully Indexed Rate represents the maximum actual interest rate that the lender may charge the borrower. It is calculated as follows:

Index Base Rate + Margin + Maximum Periodic Rate Adjustments = Maximum Fully Indexed Rate.

It is most likely for fully Indexed Rates to go up and down over the loan lifetime. Thus, they may or may not reach the Maximum Fully Indexed Rate allowed according to the program’s interest rate cap. The cap on the interest rate differs depending on the borrower’s choice of an annually or monthly-adjusting interest rate.

The interest rates and the maximum fully indexed interest rates are very discouraging for Reverse Mortgage borrowers. The one advantage here is that these interest payments get added to the loan principal (there are no payments until the borrower leaves their home). Moreover, regardless of whether the value of the property decreases over the loan lifetime, the Reverse Mortgage will never exceed the value of the property.

Loan options: home equity, Reverse Mortgage or something else?

Besides the Reverse Mortgage, retirees have other options to get cash on their properties. Other possibilities here include:

–  Home equity line of credit;

–  Second mortgages;

–  Home equity loans;

–  Downsizing;

–  Cash-out mortgage refinance with adjustable or fixed-interest rate (i.e. a refinance of the first mortgage);

Reverse Mortgage loan programs charge slightly more in their initial interest rates as compared to other home equity loan products. A real problem for personal finances, if you have a variable rate, is the possible high increase of the interest rate. And this issue affects home equity loans in most cases, since the borrower has to make monthly loan payments. If you are living on a fixed income, it could be a financial drama, with the risk of defaulting on the loan and losing the property.

Downsizing, as an alternative to Reverse Mortgage

Downsizing has often been described as the most efficient way of getting cash from your property, when in retirement. The main shortcoming for downsizing is that the real estate market varies greatly and you may have difficulties selling your home. Moreover, the costs of moving are difficult to generalize or fully anticipate.

A comparison between how much you get on the property and how much a new one would cost becomes a must. And since you consider downsizing, you might need to check with a realtor to help you sell and buy. This brings in new costs that should not be neglected either. Last but not least, the emotional attachment to a house full of memories represents a great obstacle to overcome.

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