One of the most common questions I hear is:
"Aren't reverse mortgages expensive?"
It's a fair question, and the answer is yes, they generally have higher upfront costs than many traditional mortgage loans. But that's only part of the story.
Those additional costs provide protections and benefits that simply aren't available with a traditional mortgage.
Think of it this way. A basic automobile will get you from point A to point B. A luxury vehicle costs more because it offers additional features, comfort, and safety. A reverse mortgage is similar. It isn't designed to be the lowest-cost loan. It's designed to provide financial flexibility and protections for homeowners age 62 and older.
Understanding the Costs
Like any mortgage, a reverse mortgage includes many of the same closing costs, such as:
Appraisal
Title insurance
Escrow fees
Recording fees
Other customary closing costs
In addition, reverse mortgages have three costs that often receive the most attention.
FHA Mortgage Insurance Premium (MIP)
The Federal Housing Administration (FHA) charges an upfront Mortgage Insurance Premium. This insurance protects both borrowers and lenders and helps make the program possible.
Origination Fee
The lender is paid an origination fee for processing and closing the loan. Unlike many mortgage programs, this fee is strictly limited by FHA guidelines and can never exceed $6,000, regardless of the home's value.
Annual Mortgage Insurance
There is also an annual Mortgage Insurance Premium equal to 0.5% of the outstanding loan balance. This helps maintain the federal insurance that protects the loan throughout its life.
What Do You Receive for Those Costs?
This is the part that is often overlooked.
Those additional costs help provide benefits that many traditional mortgages simply don't offer.
No Required Monthly Mortgage Payments
As long as you live in the home as your primary residence and continue paying your property taxes, homeowner's insurance, any required HOA dues, and maintain the property, you are not required to make monthly principal and interest payments.
Federal Government Insurance
Home Equity Conversion Mortgages (HECMs) are insured by FHA. That government insurance provides protections for borrowers throughout the life of the loan.
Non-Recourse Protection
This may be one of the most valuable benefits.
When the home is eventually sold to repay the reverse mortgage, neither you nor your heirs will ever owe more than the home's value, even if the loan balance is greater than what the home sells for.
A Growing Line of Credit
If you choose an adjustable-rate reverse mortgage with a line of credit, any unused portion of that line of credit grows over time. That means the amount available to borrow in the future can increase, giving homeowners additional financial flexibility later in retirement.
Looking at the Big Picture
It's easy to focus on one number on a closing statement.
I encourage my clients to look at the entire picture.
If a reverse mortgage helps someone:
Eliminate required monthly principal and interest payments
Improve monthly cash flow
Stay in the home they love
Access a portion of their home equity without selling
Protect themselves and their heirs through FHA insurance
Create additional financial flexibility during retirement
then those upfront costs may represent good value.
Every homeowner's situation is different. A reverse mortgage is not the right solution for everyone. That's why I begin by gathering just a few pieces of information and preparing a personalized proposal. Once we review the numbers together, you can decide whether the benefits outweigh the costs for your particular situation.
One final thought...
The least expensive loan isn't always the best value. The best loan is the one that helps you accomplish your financial goals while providing the protections you need.
If you're curious whether a reverse mortgage makes sense for you or a family member, I'd be happy to prepare a no-obligation proposal and answer your questions.
Douglas Michael Jones nmls 286668
Certified Reverse Mortgage Specialist
Mortgage Magic
Comments(3)