Costs and Interest Rates of Reverse Mortgages

The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program that the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there is an insurance premium of 2% of the loan and a 2% origination fee in addition to normal closing costs, which are typically several thousand dollars, but vary depending on the third-party costs (appraisal fees, title searches, etc.) that must be undertaken. Thus a $200,000 loan would have $8,000 in costs beyond the normal closing costs added onto the loan at the outset. Other programs skip the insurance premium but still require the origination fees and closing costs, and some programs waive the initial costs if the borrower borrows all or most of the maximum amount that he or she is eligible to receive. In addition, a monthly service charge (between $25 and $35) is usually added to the total amount of the loan.In all of these cases, the costs of a reverse mortgage can typically be financed with the proceeds of the loan itself, with the costs and fees being rolled directly into the principal balance of the loan, rather than paid by the borrower in cash. While this does permit borrowers with little or no available cash to get a reverse mortgage, it means that the initial loan principal will be increased, and consequently, that the fees will begin accruing interest.

Interest rates on reverse mortgages are determined on a program-by-program basis, but are typically similar to interest rates offered by Adjustable Rate Mortgages (ARMs). All major reverse mortgage programs have adjustable interest rates that are adjusted on an annual, semi-annual, or monthly basis. Because reverse mortgages have no fixed duration, typically there are no reverse mortgages with fixed interest rates. There are now some new reverse mortgage programs that have fixed interest rates.^[4] Since there are no payments made during the course of the loan the interest accrued on the principle is then added to the principle of the loan.

Some state and local governments offer low-cost reverse mortgages to seniors. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes^[3], but most of them are insured by the Federal Housing Administration (FHA) and often have more favorable interest rates and fewer or no fees associated with them. These programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.^[5]

Written by charles dennis on August 17th, 2007 with no comments.
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