The Complete Guide to Reverse Mortgage Interest Rates & Fees
I think you’ll agree with me when I say…
You can never have enough information when it comes to a financial product, especially reverse mortgages.
With the ever-changing world economy, the interest rates and fees of various mortgage plans keep on varying from time to time.
Well, reverse mortgages are not entirely left out of these economic inflations, thus making it vital for you to fully understand and learn about their rates, fees and costs.
That said, here’s a comprehensive guide that will help you get all the detail right when it comes to rates and costs involved with taking out a reverse mortgage.
Reverse Mortgage Interest Rates & Fees Explained
Like all other loans, the interest on a reverse mortgage is only part of how much it will cost you. You must also pay the closing costs; for the Federal Housing Authority’s (FHA1 ), Home Equity Conversion Mortgage (HECM2 ) product, mortgage insurance premium (MIP3 ), origination fees, third-party and servicing charges.
Since HECMs dominate the reverse mortgage loans market; we will put attention to that as we also explain other costs and rates:
#01. Mortgage Insurance Premiums
When you have weighed all your financial options, and you decide to take the reverse mortgage way, you will have to take care of the Insurance at closing.
Moreover, depending on the type of loan you get, you’ll also be required to clear the MIP through the life of the loan.
They calculate the bills upon closing based on the lesser of the estate’s appraised value or the current HECM loan limit (which is $726,525). The rate used to fluctuate, but in 2018 it became 2% for all borrowers.
Even though it’s not an upfront cost, you should note that you will also pay an insurance premium during the course of the life of the loan. In 2016, it used to be 1.25% of the balance, but with the updated MIP deduction extension from 2017, the fee is now 0.5%
So, at this point, you are wondering, “what the MIP is for?”
For the Federal Housing Administration (FHA) to reserve the reverse mortgage as a non-recourse loan, it must absorb the cost of the outstanding credit balance (if the sale of a mortgagor’s house does not pay the balance of the loan).
Having knowledge that you will never have to pay any more than the value stipulated allows you and other borrowers to worry less about paying back the debt.
Nevertheless, to uphold this deal, the FHA must collect payment.
In essence, that is the aim of it.
It’s a fee billed by a reverse mortgage lender, and they charge one when entering a loan agreement, to cover the cost of the dispensation of the loan.
HUD stringently regulates the fees, and FHA insures them – meaning that there’s a firm government-mandated cap on origination fees4 and percentages.
The law sets the maximum fee according to the formula:
- 2% of the first $200,000 of the estate’s value and 1% of the amount over $200,000
- A maximum of a $6,000 origination fee
Again, there’s much information to digest here, so you’re probably wondering what this formula means. To make things more straightforward, we’ll consider a reverse mortgage example or two.
Example 1: Let’s say your property value is at $100,000. Since the appraised value is less than or equal to $125,000; the lender can fine you any amount up to $2,500. You should, however, remember that they don’t base the fee on a percentage of the property’s value.
Example 2: Presume that your property value is at $180,000. Since, the appraised value is more than $125,000, but less than $200,000, the lender can bill you a maximum of 2% of the its worth, which, in this case, is a maximum of $3,600.
Example 3: Assume that your estate is valued at $300,000. Since it’s appraised value is more than $200,000, then the lender will charge you:
- For the first $200,000 they can charge up to 2% of the property value
- For the balance, which is $100,000, they can charge a maximum of 1%
It works out like this:
$200,000 * 2% = $4000
$100,000 * 1% = $1000
The fee is therefore capped at $5,000.
In as much, as they regulate the fees, not all lenders will charge you the maximum cost possible — there some lenders, based on the kind of loan, who will offer you a rebate. If you want to find the best and lowest costs, you need to compare multiple offers.
#03. Servicing Fees
Every home loan needs servicing, and HECMs are no exception.
If you’re not conversant with the term servicing a loan, don’t distress.
It implies the maintenance activities that are vital throughout the life of the loan, inclusive of the billing, sending up to date account statements, checking to see if a mortgagor is meeting the taxes and insurance demands, disbursing loan proceeds and ensuring that the borrower stays current on his or her payments.
So, what’s the servicing fee rate?
Well, this is typically around $25-$35. Therefore, if your loan has an interest rate that adjusts annually, the price is not more than $30. However, if it changes every month, the cap is set at $35.
The first month’s servicing fee is taken out at closing, and they’ll require you to foot the future dues throughout the life of the loan.
You should, however, note that this is less common today.
#04.Third Party Fees/Other Costs
These are appraisal fees, escrow costs, and title insurance fees, and credit checks, and they can cost you from $1000-$2000.
Due to the FHA ‘no junk policy,’ a HECM will only include reasonable fees and will safeguard borrowers from many of the additional dues some lenders will try to charge.
Understanding Reverse Mortgage Interest Rates
Interest rates are a vital factor in all loans. However, they work differently when it comes to reverse mortgages.
A standard loan or mortgage will need you to pay the interest as a part of your regular mortgage . With a reverse mortgage, interest will not be pertinent until the loan becomes due and payable since no monthly payments are required.
They add the interest to your loan balance, which isn’t due till the last mortgagor moves out of the estate or dies.
That said, if you are still adamant and ready to take out a reverse mortgage, varying interest rates may again play an essential role in your decision.
There are various HECM originations statistics published by the Department of Housing & Urban Development every month.
While rates are continually shifting, over the past three years, and with the tax deduction extension, they have floated around 5.0% for the fixed rate HECM and vary between 2.5% to 5% for the adjustable rate HECM.
Hopefully, this guide has offered you a more precise and better comprehension of reverse mortgage interest rates, and fees.
It’s crucial that you keep in mind that as time goes, and as the revolution continues, the laws are modified, and so do the fees and related costs. While these rates may not be identical around this time next year or season, they can still offer you a benchmark for prospective reverse mortgage rates5 and costs soon.