What does a reverse mortgage cost?

What does a reverse mortgage cost?

One of the biggest factors in determining whether or not a reverse mortgage is right for you is factoring in the costs. We need to figure out if the benefits outweigh the cost. A reverse mortgage is looked at as a final loan, so it can be expensive. Here are the breakdown of the costs.

1. FHA MIP: A reverse mortgage is guaranteed by the government. If you were ever to get into a situation where you owed more money on your home than it was worth, then the bank would take a loss. This loss would then be reimbursed by the government. The government charges every reverse mortgage holder FHA MIP or Federal Housing Agency Mortgage Insurance Premium. This pool of insurance helps the government repay the banks losses. The FHA MIP is usually 3% of the new principal loan amount.

2. Servicing Fee: The bank charges a monthly servicing fee of $25.00. If you have a greedy loan officer, that servicing fee can be as high as $35.00 as the bank will pay the loan officer a commission for selling you the higher servicing fee. Because the reverse mortgage does not require any monthly repayment, the banks base the total servicing fee off of your life expectancy. So $25.00 times 12 months times 20 years would be $9000.00 Rarely do we ever see such a high servicing fee. This is just to give you an idea of how it works.

3. Origination Fee: The bank will also charge an origination fee to originate the loan. This fee is usually 3.0% of the new principal loan amount. It is used as a means of compensating the bank for taking the risk of loaning you the funds for the reverse mortgage.

4. Title Insurance: The bank requires that you get title insurance every time you take out a new mortgage. This title insurance protects the bank from any future claims to your title. It protects the fact that you are the owner and will remain the owner.  Title insurance is $2.75 per thousand of the loan amount.

5. Appraisal Fee: You will need to have an independent FHA appraisal done on your home. This fee is usually $350- $400 and is the only fee that is required to be paid out of pocket. The appraiser will do an analysis of your home and determine it’s market value by comparing it to similar homes that have sold in the last 6 months.

As you can see, it is not common for a reverse mortgage to cost an upwards of $15,000.00 to $20,000.00. Those fees are rolled into the loan with the exception of the appraisal fee as it is considered a final loan. It is not right for you if you plan on using it as a temporary bridge. If you do plan on living in your home for the rest of your life you can use it a means for a better life. For some it makes a lot of sense. For others, it does not. Analyzing the cost versus benefit should allow you to make an unclouded decision.