A reverse mortgage seems like a good way for seniors to tap the equity in their home, but what about the fees? Join us as we examine reverse mortgage fees and other costs related to a home equity conversion mortgage.

According to a report by the Congressional Research Service, the total number of home equity conversion mortgages originated is about 1 million. That is not very many when you consider the program has been in existence for over 30 years. To put that into perspective, right now there are more than 40 million retirees in the U.S. and another 3.5 million retire each year. So what gives? Why have so few people signed up for a reverse mortgage?

Primal Instinct

Protecting our homes is hard-wired into our DNA. The idea that you might end up penniless and homeless is a terrifying thought. It’s the kind of thing that keeps you up at night. These kinds of instincts create a barrier to pursuing a reverse mortgage. Another barrier for some is the desire to leave an inheritance. A reverse mortgage takes a hefty bite out of your estate.

EGGSTACK RETIREMENT PLANNER

Wealth in Our Midst

A mortgage-free home represents a mountain of wealth and a huge achievement. It likely took decades of monthly mortgage payments to achieve that goal. It’s not the kind of thing anyone wants to unravel. But, when you are strapped for cash in your golden years, a reverse mortgage is worth considering. There is certainly a bit of irony in the situation. You’re stuck at home because you can’t afford to go anywhere or do anything, and your home is very place where that mountain of wealth resides.

Reverse Mortgage Review

Before we dive into reverse mortgage fees, a quick review is in order. A reverse mortgage allows homeowners age 62 and older to tap into the equity in their home without selling it. The loan does not have to be repaid until you move out or the last living homeowner passes away. You maintain ownership of the home throughout the process. Heirs typically sell the home to repay the reverse mortgage. If a home has significantly declined in value or heirs do not want to deal with it, they can simply turn the home over to the lender.

The most common form of reverse mortgage is the Home Equity Conversion Mortgage or HECM. These are federally-insured loans with virtually no income or other qualifying requirements. You must remain in the home and keep it maintained and continue to pay taxes and insurance. A home equity conversion mortgage allows you borrow up to 50% of your home’s appraised value or $970,000, whichever is less. You must pay FHA mortgage insurance on a home equity conversion mortgage. Home equity conversion mortgage fees are capped by the government.

Another type of reverse mortgage is a private or proprietary loan. You do not have to pay FHA mortgage insurance on these types of loans, but that also means they are not backed by the federal government. Unlike a home equity conversion mortgage, there is no limit on your home’s value, but there is also no limit on the loan fees. Most people go with the government-backed home equity conversion mortgage. Those who opt for a proprietary reverse mortgage usually do so because they want to borrow more than the government limit. 

Reverse Mortgage Fees

Just like with a regular mortgage, there are upfront fees associated with a reverse mortgage. These include the usual suspects such as the appraisal, title insurance, and inspection. The loan origination fee is what the lender charges to process the loan. For a home equity conversion mortgage, the loan origination fee is capped at 2% of the first $200,000 of the home’s value or $2,500, whichever is greater, plus 1% of any value over $200,000. The total loan origination fee cannot exceed $6,000.

The real gotcha on a home equity conversion mortgage is mortgage insurance. The upfront premium is 2% of the home’s appraised value. A home appraised at $500,000 would have an upfront mortgage insurance premium of $10,000. It’s typically rolled into the loan so you don’t have to pay it out of pocket, but you pay it nonetheless.

Then there are the ongoing mortgage insurance premiums. These fees are 0.5% of the amount borrowed, every year for the life of the loan. They do not disappear at a certain threshold like they do on a regular mortgage. Borrowing 50% of a $500,000 home will have you paying $1,250 in annual mortgage insurance premiums.

Finally, there are loan servicing fees. These cover things like account statements and overseeing the loan to ensure you are keeping up with the taxes, insurance, and maintenance. Home equity conversion mortgage lenders are allowed to charge up to $30 per month for service fees on a fixed rate mortgage, and $35 per month for variable interest loans.

Conclusion

Like with any loan, you must pay interest in addition to the fees. Instead of decreasing over time like a conventional loan, reverse mortgage interest charges increase over time as more and more equity shifts from your home to the loan balance. Interest charges are not paid out of pocket, they are assessed by reducing your home equity.

If you are considering a reverse mortgage, read the contract carefully. Opting for a home equity conversion mortgage should not result in you being penniless and homeless at the end of your life. As long as you follow the rules, you cannot be thrown out of your home even if the amount received exceeds the total value of your home.

Photo credit: Pixabay Eggstack News will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.