Homeowners who are 62 years old or older and have paid off most or all of their mortgage can withdraw a portion of their home’s equity and get it converted into cash. It is a particular home loan called a reverse mortgage . When assessing reverse mortgage fees compared to other possibilities for strategic retirement, you should consider a HECM (spoken as HE-KUM), which stands for Home Equity Conversion Mortgage. It is a reverse mortgage regulated and started by the U.S. Department of Housing and Urban Development or HUD. A HECM is not a loan awarded by the government. It gets issued by a lender. However, the Federal Housing Administration (FHA), a division of HUD, insures it.
This loan got created as a way to assist retirees who have limited income using the accrued wealth in their homes to pay for health care and cover necessary living expenses monthly. However, a borrower can use reverse mortgage proceeds on whatever he or she desires, as there is no restriction for how the money gets used. This loan works in the opposite way of mortgages. Instead of the borrower making payments every month like a normal mortgage, the bank will make payments to you, the borrower. You don’t pay back the loan until the home is vacated or sold. Provided the borrowers remain living in the house, he or she does not have to pay towards the balance monthly.
HECM Reverse Mortgage Fees
A reverse mortgage is not like most home equity loans primarily because of its high costs. Some of these fees include a loan servicing fee, third-party closing costs, initial and annual mortgage insurance premiums, and a loan origination fee. It’s also important to note that reverse mortgage rates are typically higher than a regular home loan. The charges could vary for several reasons depending on your credit profile, how much you borrow, the appraised value of the home, how you withdraw your funds, and so forth.
- Loan origination fee: Many lenders charge this fee for the processing, underwriting, and closing of a loan, including HECM. It could cost you two percent or $2,500 of the first $200,000 of the appraised value of your home, depending on which one is greater. For the amount over $200,000, the cost is one percent. It used to be that the loan origination fees were the primary hindrance to getting a reverse mortgage, but now the price gets capped at $6,000. Although it still digs into your proceeds, you can roll the HECM origination fee into your loan.
- HECM counseling fee: It’s a requirement for getting a reverse mortgage that borrowers have counseling with a HUD-approved third-party HECM counselor. According to the Consumer Financial Protection Bureau, the fee is usually close to $125. In counseling, the loan eligibility requirements, the lending process, drawbacks, and benefits get discussed. This charge is an out-of-pocket fee that cannot get rolled into your loan because you must pay it to the counseling agency directly in almost all cases.
- Third-party closing costs: There are standard mortgage fees, not limited to title insurance, loan recording, credit checks and so forth. You should ask your lender for a breakdown that details each charge to accompany your closing disclosure. You have the option to look around for a personal title company, other than the one your lender suggests, for title insurance and title search.
- Appraisal fees: You must get a professional home appraisal to get a Home Equity Conversion Mortgage, which will run, on average, from $300 up to $500. The cost of evaluations can vary depending on the condition, age, and size of your home. You pay this fee to an appraisal management company upfront.
- Initial MIP: The initial mortgage insurance premium is two percent charged at closing.
- Long-term property costs: The FHA requires borrowers applying for a reverse mortgage to prove they have sufficient income to continue paying all the standard fees, like annual property taxes, hazard insurance premiums if it refers to your area, homeowners’ insurance premiums and homeowners’ association (HOA) dues, among others. You probably will not qualify for a reverse mortgage if there are any liens on your property for failure to pay HOA fees or property taxes.
- Loan servicing costs: If the interest rate of your reverse mortgage adjusts annually, lenders can charge a monthly loan servicing fee of up to $30 or $35 if the interest changes by the month. Loan servicing can increase your loan balance over time because, at closing, your lender takes the amount from your available funds and adds it to your monthly loan balance. The servicing fee can also get added to your interest rate by the lender, which can raise your loan balance each month.
- Annual mortgage insurance premiums: HUD reports this to be 0.5 percent of your outstanding mortgage balance, which you pay over the existence of your loan. You’ll also be responsible for paying an FHA MIP. This premium serves as collateral for loan advances. Your mortgage insurance premiums can roll into your loan. Its interest accumulates for the life of the loan.
Mortgage Rate Charts
Mortgage rate charts can be one of the most helpful items in researching good rates. A mortgage rate chart can show you the average rate for mortgages over a specific period of time, usually monthly or yearly. This can help you evaluate the current costs for borrowing money.
Finding Banks With Best Mortgage Rates
The prevailing thought about reverse mortgages used to be it should be a final resort. That’s not so much the way of thinking nowadays. You have different options for tapping into the equity of your home with a reverse mortgage while continuing to live there for years to come. You want to find a lender who knows the products, and that should begin by searching in the database of the National Reverse Mortgage Lenders Association (NRMLA) for a member lender. Contact a HECM counselor to sign up for counseling if you think a reverse mortgage could be right for you. You can call HUD at (800) 569-4287, toll-free if you want to learn more. An FHA-approved lender could help you if you choose to apply for a reverse mortgage.
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