Taking out a reverse mortgage loan can be a great way to supplement your income during retirement. However, it is important to understand the fees associated with this type of loan before you make a decision. As with a traditional mortgage, borrowers will normally have to pay the one-time upfront costs at the start of the reverse mortgage. Additionally, an annual 0.5% mortgage insurance premium (MIP) is charged based on the amount borrowed.
The Department of Housing and Urban Development (HUD) also requires that all applicants for reverse mortgages participate in mortgage counseling, which has an associated opening fee. HUD rules allow eligible co-borrowers and non-borrowing spouses to remain in the home if the main borrower moves or dies, without any obligation to repay the reverse mortgage. A reverse mortgage is different from a traditional mortgage in that it can defer paying off the balance of your loan (principal, interest, and FHA mortgage insurance premium) until you sell, move out of the house, or die. Other disclosures, such as an amortization table, are provided to keep you fully informed about the costs associated with your reverse mortgage. If the estimated cost of repairs is less than 15 percent of the maximum claim amount, the cost of the repairs can be paid with funds from the reverse mortgage loan and completed once the reverse mortgage has been issued. Other key factors that influence the rate you receive are your credit history, the price and location of the home, the type of interest rate (fixed or adjustable), existing mortgage liens, the amount of the loan, and the method of disbursing the reverse mortgage you select.
Counseling addresses all aspects of the reverse mortgage process, including the benefits of the loan, potential drawbacks, and eligibility requirements. One such document is the Disclosure of the Total Annual Cost of Loan (TALC), a form required by the Federal Reserve Board in all reverse mortgage transactions, which illustrates the cost of the loan if it is outstanding for different periods of time. A HECM is a reverse mortgage backed by the federal government through HUD. With this information, you can begin to objectively compare a home equity strategy, in this case a reverse mortgage, with others such as refinancing or selling your home. In summary, taking out a reverse mortgage loan involves several fees including one-time upfront costs at the start of the loan, an annual 0.5% MIP based on amount borrowed, and an opening fee for counseling. Additionally, if repairs are needed they can be paid for with funds from the reverse mortgage loan.
All these costs are added to balance due when you move, sell your house or die.
