Will reverse mortgage closing costs, interest rates, and other features affect your decision to take out a loan? Brookings Institution reports that less than 1% of eligible property owners have taken advantage of a reverse mortgage option in the past, but it is well worth exploring if you have equity in your home.
At Smartfi Home Loans, LLC, we’re here to help. Today, we’ll discuss everything you need to know about reverse mortgages below, including how a homeowner aged 62 or older** could use this resource to supplement their income.
What Is a Reverse Mortgage?
Simply put, a reverse mortgage loan gives older American homeowners a way to turn their home’s equity into cash. The funds you receive can be used for almost anything, including paying off your existing mortgage (required as part of the loan), eliminating credit card debt, medical and other bills, or simply improving your retirement lifestyle.
The most common type of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM and is insured, and regulated, by the Federal Housing Administration (FHA). Being regulated by the FHA means a HECM has certain features in place to protect borrowers; one of which is a counseling requirement. Since the loan is insured by the FHA, the borrower will never owe more than the value of the home when the loan comes due.
Instead of traditional monthly mortgage payments, a reverse mortgage is normally paid back at the end of the loan term in one lump sum when the homeowners permanently leave the home. During the life the loan, the borrower is only responsible for paying property taxes and insurance, any HOA fees and for maintaining the property.
Reverse mortgages provide substantial proceeds to the homeowner – as much as 60% -70% of your home’s value. The older you are, the more money you are initially eligible for. The amount you can borrow depends on your age, property value, and interest rate.
Loan amount calculation is based on:
- Age of the Youngest Borrower
- Appraised Home Value
- Current Interest Rate
Other factors to know:
- The property must be FHA approved.
- Qualification is based on the youngest borrower on the application.**
- Primary residence means that you must reside at the property consecutively for six months and one day per year.
- You must continue to pay property taxes, home insurance, any HOA fees, and continue to maintain the property.
- Reverse mortgages can be used to pay off existing mortgages on your home. In fact, if you have a traditional mortgage, it is required that you pay off this mortgage (and any additional liens on the property) with the proceeds of your reverse mortgage loan.
An origination fee is a standard requirement when closing a loan. The FHA strictly regulates loan costs for non-proprietary loans to cover the lender’s operating costs and protect the borrower.
Lender Servicing Fee
The lender servicing fee will also cover the lenders’ administration costs, title insurance, other insurance, and monitoring taxes.
Other Reverse Mortgage Closing Costs
In most cases, a borrower can also expect to pay several closing costs to the financial institution that underwrites their debt, including:
- Title Insurance: Protects the borrower and lender against potential losses surrounding property ownership disputes.
- Credit Report Fee: Charged to verify a borrower’s credit history and check existing judgments or liens.
- Documentation Preparation Fees: Covers the preparation of final closing documents.
- Appraisal Fees: Borrowers pay the appraisal fee paid to the appraisal management company (to cover any appraisal costs on the property’s repair needs).
- Flood Certification Fee: Covers floodplain assessment.
- Pest Inspection Fees: Covers pest infestation checks.
- Courier Fee: Funds the delivery of documents between the lender of the loan, investor, and title company.
- Recording Fee: Funds the recording of the mortgage lien with the county clerk.
- Settlement (Closing or Escrow Fees): Covers any closing service fees like a title search.
- Survey Fees: Funds the surveyor’s confirmation of the property’s boundaries.
- FHA Mortgage Insurance Premium: Mortgage insurance premiums on FHA-approved loans to protect the lender if the borrower defaults on the mortgage payment.
- FHA Counseling Fees: Paid directly to a U.S. Department of Housing and Urban Development HUD-approved counseling agency for mandatory sessions.
Reverse Mortgage Loan FAQs
Reverse mortgages are a safe and secure financial tool, but sometimes a few misconceptions come up. Let’s go over some common questions and concerns so you can understand the facts.
Does the bank own my home?
No, the bank never owns your home. You remain the owner of your home and can stay as long as you wish. As the homeowner, you must continue to pay home insurance, property taxes, any HOA fees and keep up basic home maintenance during the loan period.
When the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to you or your heirs.
How much can I borrow?
Three factors are considered to calculate how much equity you can access:
- The age of the youngest borrower
- Home value
- Current interest rates
Although we use the home value you initially provide us to calculate the preliminary loan amount, an independent appraiser must visit your home to ascertain the current value of your home. We then re-calculate the loan amount according to this official home value.
What if I have a mortgage already?
That is absolutely fine.
If you qualify, a reverse mortgage will first pay off your existing mortgage and then give you the remaining proceeds. In fact, many of our borrowers use a reverse mortgage for that purpose—to eliminate monthly payments* on their traditional mortgage.
Will my children lose their inheritance?
Your children have options when it comes to your home. Typically the loan is repaid through the sale of the home. Your heirs can choose to sell the home, pay the loan and receive any remaining equity; or, they can purchase/refinance the home, and pay back the loan with a traditional mortgage.
Does a reverse mortgage require that I make monthly payments?
There are never any monthly mortgage payments. However, payment of taxes, insurance, any HOA fees, and general upkeep of the home are the responsibilities of the homeowner. The loan becomes due when the last borrower permanently moves out of the home.
What you can use your reverse mortgage for?
The tax-free money you receive is intended to support your retirement lifestyle. The funds can be used now, later or kept for an emergency – it’s all up to you!
- Increase monthly cash flow
- Pay off an existing mortgage (required as part of the loan)
- Pay credit card bills
- Pay medical bills
- Fund home repairs and improvements
- Pay property taxes and home insurance
- Improve your lifestyle
- Invest or diversify your retirement portfolio
- In–home care
Reverse Mortgage Safeguards
Consumer safeguards are created to ensure you and your family understand how a reverse mortgage works. Here are just a few of the important consumer safeguards put in place for your benefit:
The U.S. Department of Housing and Urban Development requires all reverse mortgage applicants, whether they be obtaining a HECM (Home Equity Conversion Mortgage), Smartfi Choice, or other reverse mortgage, to undergo third party counseling so that you feel completely comfortable with the process and understand all your options.
No Prepayment Penalty
You can choose to repay the loan at any time without incurring any additional costs.
A non-recourse loan protects you from being held liable for the loan beyond the value of the home. Your financial obligation to the lender will not be more than the home’s value when the reverse mortgage loan comes due.
Addressing Other Concerns About Reverse Mortgages
Taxes and Insurance
You are required to remain current on your property taxes, home insurance, and if applicable, condo fees and homeowner association fees.
You are responsible for completing mandatory repairs and basic home maintenance during the life of the loan.
The home must be your principal residence which means you need to live in your home consecutively for six months and one day of the year.
Plan your financial future with complete peace of mind with Smartfi Home Loans LLC’s reverse mortgage products. Call (877) 816-6706 or contact us online today to learn more about how to tailor reverse mortgage closing costs to suit your needs.