This information can help you learn about the reverse mortgage.
How is the Government Involved?
This is a big point of confusion, especially since advertisements have sometimes promoted the reverse mortgage as a “government benefit” of some kind. First, it’s important to note that the FHA, a government agency, is not loaning you any money. You are working with a private company, and the FHA is providing a guarantee on your loan. This guarantee protects you in two significant ways.
First, the FHA guarantees that the senior will receive all the payments that he or she is entitled to as a result of the reverse mortgage. This removes the risk of the lender going bankrupt or simply refusing to make good on its obligations. Second, the FHA protects the borrower and his/her estate from ever owing more on the loan than the home is worth. In circumstances where the debt outstanding on the reverse mortgage exceeds the value of the home, the FHA covers the difference.
The amount of your reverse mortgage is based on how old you are, how much your home is worth, and what interest rate the lenders offers to you. Generally speaking, the older you are and the more your home is worth the more you’ll receive.
With a reverse mortgage there is no loan to repay as long as you are alive, living in the home, and keeping the terms of your loan. You can have the money disbursed to you in the form of a check or a line of credit. Lump sum payments are also popular; in 2011, 73% of borrowers chose a lump sum payment.
The loan generally does not have to be paid back until either the last surviving homeowner dies or moves out of the home. After that happens, the estate typically sells that home and uses the proceeds from that sale to repay the reverse mortgage loan. If there is extra money left over the heirs get to keep it. If the house is sold and there is not enough money to repay the payments that the lender has made, then it’s tough luck for the lender. They have to accept the financial loss and cannot go after the heirs for the balance.
Reverse Mortgage Fees?
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. This is multiple smaller fees paid to individual third parties, but we’ve lumped them together for simplicity. Appraisal, title, inspection and so on.
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 will also 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, we have our origination fee, calculated as $200,000 * 2% + $100,000 * 1% = $5,000
Second, we have third party closing costs, which we’ll estimate at $1,500.
Third, we have the upfront MIP, calculated as $200,000 * 2.0% = $4,000
This gives us an upfront cost of $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 get a rebate, which is essentially a negative origination fee.
Does a Reverse Mortgage Borrower Have Any Obligations
First of all, the home must continue to be used as the primary residence. Seniors must also maintain the home, do needed repairs, and stay current on property taxes and homeowner’s insurance premiums. Otherwise they risk default. Bankruptcy can also 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.