Typical Fees, Costs and Repayment
The fees and costs associated with a reverse mortgage typically run about 5% to 5 1/2% of the loan amount. There are no up front costs, all fees and costs are generally added to the loan so that there is no out of pocket cost to the borrower.
Typical Fees and Costs
The costs associated with a reverse mortgage break down basically into 3 categories:
1. Mortgage Insurance Premium
Approximately one-third of the total cost. This is paid to FHA. It is insurance which insures that if you die, the value of the house is worth at least the amount of the loan at that time.
2. Loan Origination Fee
Approximately one-third of the total cost. This is compensation paid to the company that helps you obtain the reverse mortgage. This is typically about 50% of the amount of compensation received by a mortgage company on a traditional, forward mortgage.
3. Various Title Company Expenses
Approximately one-third of the total cost. These are third-party costs for other necessary services, such as the title policy, appraisal, survey, document preparation charges, attorney fees, and compensation to the Title Company.
All fees on a reverse mortgage are regulated and capped by the U.S. Government. In evaluating the fees associated with a reverse mortgage, the key question to ask yourself is - how long do you plan to stay in your home? If long term, you can spread those fees over a number of years, making the cost only about $500-$800 per year.
Loan Repayment
The loan is not due and payable until the borrower no longer occupies the home as a principal residence. (i.e. the last surviving borrower sells, moves out permanently, or passes away.)
Interest Rates
The rate on your reverse mortgage is typically 5%-6% and is adjustable monthly or annually. The most common reverse mortgage is the monthly adjustment reverse mortgage. The interest rate on this loan is 1% above the 1-year T-bill rate, which changes every Tuesday. Please note that the 1-year T-bill rate is equivalent to the CD rate and has not been over 6% in excess of 15 years. The last time it was over 6% was 1990.
Regarding the interest that is added to your loan, it is added monthly and you receive a monthly statement. Please take comfort in knowing that approximately the first 4% of appreciation that occurs on your house each year usually covers the interest being added to your reverse mortgage loan balance on the average term loan.
