The costs of a reverse mortgage
Many people worry about getting a reverse mortgage because of the upfront costs. While these costs should be taken into account as a whole, it is important to remember that these costs can be worked into the loan itself and lead to little or no money upfront. This can change some terms of the loan and effect the interest rate. Another thing to consider is that the money may earn higher interest itself if it remains in a different investment vehicle so financing the upfront costs might be a better financial decision depending on your situation. While the actual numbers can vary a great deal, we will try to provide some basic background into what a reverse mortgage can cost you upfront if you choose not to finance the costs into your loan.
The most popular type of reverse mortgage in the US is the FHA Home Equity Conversion Mortgage (FHA HECM).
For the FHA HECM, the following types of costs will apply:
- Mortgage Insurance: 2% of the appraised value
- Origination Fee: The cap is 2% of the first $200,000 and 1% thereafter, with an overall cap of $6,000
- Title Insurance
- Title, Attorney, and County Recording Fees
- Real estate appraisal: $300-$500
- Survey (may be required): $300-$500
Interest rates on reverse mortgages can differ depending on the program you may choose. Up until the last two to three years, most reverse mortgage rates were variable however it is now possible to obtain fixed interest rates. There are also unique reverse mortgages offered by state and local governments. These can be for specific purposes such as making home repairs and/or paying property taxes. Because they may have little or no upfront fees attached to them, qualifications can be more strict. If you have a more unique situation or specific need for your loan, you should check to see if any such programs are available to you.
Jumbo Reverse Mortgages
The limit on a typical reverse mortgage is $625,000 however for loan amounts above that, there are certain Jumbo reverse mortgages you can take out.
A Case Example
February 2007, Source
Jean Ingram had a home purchased in 1978 in Huntington Beach, California. She purchased the home for $135,000 and by 2007 it was valued at $1.2 million dollars.
In 2006, she became worried about not having much monthly income yet was sitting on a great deal of equity in her home. Fearing she would have to sell, she began looking into other options. At the end, Ingram was able to stay in her house by taking out a jumbo reverse mortgage on the property. In this case, it was considered jumbo because the amount was $388,000. She was able to take the loan out (money upfront in this case), upgrade her roof and patio, and put $150,000 into certificates of deposit. At that time, she was planning to buy a condo that would throw off rental income.
The cost or profit of a jumbo reverse mortgage
Take out a $700,000 reverse mortgage on a home valued at $2 million dollars with a fixed interest rate of 8.85%. Depending on how quickly you tapped into the money, the total debt could balloon to between $915,000 and $1.7 million in 10 years. This might sound scary, however if this home appreciated by 4% per year over those 10 years, it would be worth nearly $2.7 million dollars. This could then be sold for a very nice profit!