The Paseo Financial Group
There are three major fees that borrowers must pay. Most are similar to those paid on a forward mortgage.
These are the upfront fees that you will need to pay:
Origination fee paid to the lender. This is government regulated and ranges from a minimum of $2,500 to a maximum of $6,000, depending on how much your property is worth. The exact formula is 2% of the first $200,000 in property value and 1% of the amount above $200,000.
Third party fee(s). There are smaller fees paid to individual third parties, but we’ve lumped them together for simplicity. Appraisal, title, inspection, escrow, etc.
Upfront mortgage insurance premium (MIP). This fee is paid to the FHA, and in all cases, it is 2% of the property value. This premium pays for the protections that the FHA gives to borrowers.
Over the life of the reverse mortgage, borrowers must also continue to pay a 0.5% annual MIP on the loan balance. Interest also will accrue on the balance. Generally, the costs of a reverse mortgage are financed into the loan so that the borrower does not have to pay out of pocket. Instead, the money is being taken from the home’s equity.
Let’s return to our example from before, where we owned a $300,000 home and add up the fees.
First is the origination fee, calculated as $200,000 x 2% + $100,000 x 1% = $5,000.
Second are third party closing costs, which we’ll estimate at $1,500.
Third is the upfront MIP, calculated as $200,000 x 2.0% = $4,000.
This gives an upfront cost of about $10,500, which is generally financed, meaning it is added to the loan balance. This means that before you borrow any money, you have spent $10,500 of your home equity to obtain the loan.
Of course, not all lenders charge the maximum origination fee possible. It’s possible to find one who will charge you a reduced amount, and in some cases it’s possible to even get a lender credit.
The home must continue to be used as the primary residence. Seniors also must maintain the home, do needed repairs, and stay current on property taxes and homeowner’s insurance premiums. Otherwise they risk default. Bankruptcy also can be a violation of the reserve mortgage agreement. Once the homeowner is in default, they are subject to foreclosure—and the unexpected loss of one’s home can be especially tragic for an elderly person. Thankfully, the financial assessment added in 2014 makes this far less likely.
Melanie Sedam is a HUD-certified HECM mortgage originator and owns ReverseMortgage62AZ.com, which specializes in mortgage financing in the 55+ communities of Arizona. She can be reached by simply calling 520-829-5219 or emailing her at [email protected]. There also is a 35-minute PowerPoint presentation on her website that goes into the financial details/numbers of a reverse mortgage loan.