Understanding Costs in Reverse Mortgages

Mortgage and Lending with NMLS #384936 NMLS #384936

A reverse mortgage is a financial product available to seniors looking for additional income in retirement. It is a great option for people who meet the requirements to supplement income.  There are, however, some unique circumstances in reverse mortgages that need to be understood. Of course, your best option, is to talk directly to a local, licensed Reverse Mortgage Advisor to get your questions answered and determine if a reverse mortgage is right for you.


Explain why I don’t pay principle and interest on my reverse mortgage.

With a Reverse Mortgage, you don’t pay principle and interest like a traditional loan, and are only charged interest on the loan balance. Additionally, the interest isn’t paid until the loan repayment date. With a traditional loan, the person is responsible for repayment. With a Reverse Mortgage, the property is responsible for repayment, as it is a non-recourse loan. That means the lender cannot come to the borrower or their heirs to receive payment.


Do I earn interest when I take the Line of Credit pay out option?

No, interest isn’t earned like it would be on a savings account. Consider it more line an available line of credit on a credit card- if the line isn’t used, it simply sits, it doesn’t earn interest. The growth feature that is part of the Line of Credit pay out option on the reverse mortgage simply extends the credit line available. The line of credit increases 5% each year regardless of what happens to the property value.


Is a Reverse Mortgage a second mortgage?

You will sign two mortgages and notes at your closing because your lender is the first lien and the FHA is the second lien. This allows the FHA to assume the loan in the case of your lender failing to meet its obligations. It creates additional protection put in place by the FHA under the HECM legislation.


What is the monthly servicing fee?

There are fees associated with the administration of your reverse mortgage and the monthly servicing fee offsets these costs. Administration on the account can include record maintenance, property tax verification, insurance premium verification, certification of occupancy, issuing and collecting payments, and general customer service tasks and loan management.


Am I required to have Mortgage Insurance with a Reverse Mortgage?

Yes under the HECM program, a mortgage insurance premium is required based on the amount of funds to be withdrawn in the first year. If funds withdrawn in the first year will exceed 60% of the available funds, you will pay a significantly higher premium than if they are not. Your advisor can explain the value of these options when you discuss your reverse mortgage options together.


The Mortgage Insurance Premium guarantees that you will never owe more than what your home is worth when the reverse mortgage is to be repaid. It also protects you with government backing of the funds.


What is a Repair Rider?

Sometimes repairs will be required on your home in order for them to meet the loan requirements. The Repair Rider means that you are under obligation to make those repairs in a timely manner as a condition of the loan.  There may be a portion of your funds that are set aside specifically for the funding of the needed repairs, and inspections will be required to verify the repairs have been completed to the lender’s satisfaction.


For more information about the costs and unique circumstances involving a reverse mortgage, contact a professional mortgage lender today. Together you can discuss your objectives with a reverse mortgage and discover what to expect through the process.

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