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CostHelper > Personal Finance  > Real Estate > Reverse Mortgage

Reverse Mortgage Cost


How Much Does a Reverse Mortgage Cost?

 
 average costInsurance Premium: 2% of Home's Value and Loan Amount  
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A reverse mortgage is a loan taken out on the equity of a home that does not need to be paid back until the owner moves out, dies or defaults on the loan.

Typical costs:

  • The two major costs associated with the reverse mortgage are the mortgage insurance premium and the origination fee; each equal to a charge of 2% on the home's value and the amount of the loan, respectively. Both can be folded into the loan amount, and would not become due until the end of the loan.
  • Homeowners can borrow as much as the appraised value of the home or the maximum principal amount that can be insured by the Federal Housing Authority. This varies by geographic area and changes frequently, according to the US Department of Housing and Urban Development; the current maximum is $625,500.
  • The mortgage insurance premium, which protects the lender in case the homeowner defaults on the loan, is both an up-front cost and an ongoing cost. At closing, when the reverse mortgage is taken out, the insurance premium is charged as a percent of either the appraised value of the home, $625,500, or the home's sale price, whichever is lowest.
  • For example, the Standard reverse mortgage insurance premium is 2%, or $4,000 on a $200,000 home. The premium's maximum rate -- 2% of $625,500 -- is $12,510. The Saver[1] reverse mortgage insurance premium, made available for smaller loans in 2010, is .01%, or $200 on a $200,000 home.
  • In addition to the up-front mortgage insurance premium, an annual mortgage insurance premium of 1.25% of its balance will be charged over the life of the loan. This would amount to $2,500 annually on a $200,000 home. The origination fee, which covers the lender's operating costs, amounts to 2% of the loan, up to $6,000.
  • The interest rate on reverse mortgages is typically .25%-2% higher than the prime mortgage rate, which as of April 2012 is 3.5%-5.25%.
Related articles: Property Appraisal, Refinancing a Mortgage, Real Estate Contract Review, Home Equity Loan

What should be included:
  • Reverse mortgage holders are borrowing back the equity on their home. For example, if a home is valued at $200,000 but the owner only owes $50,000, they have up to $150,000 in equity from which to borrow.
  • Unlike a home equity line of credit, borrowers don't pay the borrowed amount back in monthly payments of principal and interest. Instead, the money becomes due when the home is sold, which typically happens when the owner moves out of the home or dies. Typically, money generated through the home's sale is used to pay the reverse mortgage lender.
  • There is no credit check or income requirement to take out a reverse mortgage. Applicants must be at least 62 years old, live in the home and have a mortgage balance that is less than the loan amount.
  • The loan amount can be paid out as a lump sum to the borrower, as a line of credit to borrow from as desired, in set monthly payments from the lender to the borrower, or a combination of these options.
  • For more on how reverse mortgages work, visit the Housing and Urban Development's Q&A page[2] .
Additional costs:
  • Additional costs include a home appraisal, title insurance, recording fees and other typical closing costs, which combined can be $1,020-$10,000 or more.
Shopping for a reverse mortgage:
  • Due to the economic recession of 2008, brought on by the housing market crash, the federal government changed regulations regarding reverse mortgages. The AARP provides a fact sheet[3] on these changes and how they affect current and potential reverse mortgage holders.
  • Ibis offers a reverse mortgage calculator[4] to estimate fees.
  • Reverse mortgages have been strongly criticized[5] by many financial experts for being overly risky and expensive.
  • The Federal Housing Authority, which administers the Home Equity Conversion Mortgage product where the vast majority of reverse mortgages originate, advises meeting with a financial planner[6] to decide whether a reverse mortgage is the best option.
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External Resources:
  1.  www.aarp.org/money/credit-loans-debt/info-10-2010/new-reverse-mortgage-for-less.2.html
  2.  portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten
  3.  assets.aarp.org/rgcenter/ppi/ltc/fs211-economic.pdf
  4.  rmc.ibisreverse.com/default_nrmla.aspx
  5.  www.smartmoney.com/spend/real-estate/the-pitfalls-of-reverse-mortgages/
  6.  www.napfa.org/
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