Many seniors find themselves unable to make ends meet in their golden age. It’s not always because they don’t have any money. Sometimes they simply don’t have enough money to make ends meet. Or, they need money for long-term care. These wise seniors are in the fortunate position of owning their homes. In this situation, you’d be able to use a reverse mortgage to help cover monthly expenses.
Reverse Mortgage Definition
A reverse mortgage is a type of backward loan that pays a lump sum or monthly payment based on the home value and the equity you have in your home. You can continue receiving payments until you move out of the home, sell the home, or pass away. Seniors age 62 and above who live in the home they own, are qualify for receiving a reverse mortgage. There are no income restrictions or credit checks.
Types of Reverse Mortgages
Reverse mortgages come in two types – those that are backed by the federal government and those that are not. Federally backed reverse mortgages are known as Home Equity Conversion Mortgages or HECMs. These mortgages have a federal mortgage insurance that guarantees you continue to have access to your funds if the lender happens to go out of business. HECMs also have the benefit of ensuring that your loan balance never exceeds your home’s value.
Private reverse mortgages have some benefits, too. Since HECMs have a federal cap of $625,000 based on where you live. If you have a higher valued home, you may not receive the most amount of money that is inside the equity of it with a HECM loan. Private reverse mortgages don’t have caps and allow you to receive more money from your home, if your home equity is high. However, private reverse mortgages tend to have higher fees and increase the total amount that will be eventually owed.
The reverse mortgage is a loan against your home. As long as you’re living in the home, you don’t have to worry about making payments. Once you pass away, sell the home, or permanently relocate, the lender will call the reverse mortgage due. At that point in time, it’s up to your heirs to sell the home or refinance the mortgage to pay off the loan.
Cost of a Reverse Mortgage
Reverse mortgages aren’t without fees. In fact, at 8% to 10% of the home’s value, the fees can be quite expensive. That would equal fees of $8,000 to $10,000 per $100,000 of your home’s value. These fees are often subtracted from the reverse mortgage rather than added to it. For example, if your home is worth $200,000, your fees might be $20,000. Your reverse mortgage, at 60% of your home’s value would be $120,000. After fees, you would end up receiving $100,000 in a lump sum, line of credit, a monthly payment, or some combination of all these.
What are the fees that make a reverse mortgage so expensive? Here are some of them:
- Origination Fee. This is the fee paid to the lender for the cost of creating, processing, and closing the loan. HECMs have a cap of 2% on loans up to $200,000. If your loan is greater than $200,000, there is an additional 1% fee on the excess. The maximum fee is $6,000.
- Appraisal Fee. To receive a reverse mortgage, you must have your home appraised. This helps the lender discover your home’s value and ensure that there is no structural damage to the home that needs repairing. The appraisal fee is typically about $300 to $400. If you need a follow-up appraisal, the cost is usually $50 to $75.
- Closing costs include most of the costs that occur while your loan is being processed. They include attorney fees, recording fees, document taxes, survey fees, application fee, title inspection fee, and the cost of doing a pest inspection. Typically, closing costs are between 2% and 4% of the loan.
- Monthly service fee is only about $30 to $35 each month that you have a loan balance. But, after having your reverse mortgage for several years, the service fee can add to up to thousands of dollars. For example, a $30 fee for 10 years, would add up to $3,600.
- The mortgage insurance premium is paid on federally backed mortgages to ensure that you’re still able to receive your funds if the lender goes out of business. The upfront premium will end up being 2% of your claim amount or 2% of your home’s value…whichever is lower. While the loan is still in effect, you’re charged 0.5% of your balance.
Making a Reverse Mortgage Decision
Even though a reverse mortgage can have high fees, the payout may still be enough to help you cover your monthly expenses. Go over the numbers with a trusted family member, friend, or attorney to see if a reverse mortgage would be right for you.
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