The Reverse Mortgage is expensive...right?

All Reverse Mortgages are expensive…right?

Many people have the assumption that all Reverse Mortgages(RM) have very high initial costs. This is not true.

With a Reverse Mortgage (RM) there are standard closing costs just as with a conventional mortgage. These include title, escrow, appraisal etc. Generally the two most significant costs on an RM on top of these costs are the origination fee and the upfront FHA insurance.

The origination fee has a maximum amount of $6,000 and the FHA insurance is 2 percent of the Maximum claim amount. This would be capped at $12,500 based on current maximum claim of $625,500. So on a deal that has all the maximums, the total closing costs could be around $20,000. This is rare as the FHA insurance would only be that high on properties that are worth $625,500 or more.

In 2010, the “Saver” program was introduced. On these programs, instead of the FHA fee being in the thousands, it can be more like $60. Also on some programs the origination fee can get down to as low as $0. So if you had a Saver program with $0 origination fees, the overall closing costs could actually be a little lower than on a conventional loan. In some cases, there can even be an additional
credit to go towards the closing costs.

So why doesn’t everyone just do the “Saver” program? The drawback on the Saver program is that the client receives less funds than on a standard program. This can make a difference for some who need every penny they can get. For those that do not need all of the funds they qualify for, the “Saver” program is a great option.

The costs involved with an RM are generally not out of pocket costs other than maybe the counseling fee (which can be around $120) and maybe sometimes the appraisal fee (Could be around $500). I always try to have the appraisal fee collected at closing. The other costs would just be added to the loan balance.

The closing costs being paid are really based on the program and funding needs of the client. A client needing maximum income and funds would most likely benefit by the loan with the higher initial costs. A client consolidating existing debt and not needing all the funds they qualify for would benefit by the “Saver” low-cost option.

Many senior homeowners have used the "Saver" option along with a line of credit option as a financial planning tool, utilizing these funds and not touching current investments or deferring Social Security income.

The RM is for senior homeowners (62+) who may have a need for additional income, debt consolidation, remodelling costs, in home assisted living etc...The decision on costs can be secondary to what is the best solution for the challenge.