Only 26% of Americans have more than $200,000 saved for retirement.
Many people depend on Social Security to pay for retirement, but those payments aren’t likely to be enough to cover basic expenses and medical bills.
One of the other options that people turn to reverse mortgages to provide them with living expenses. There is a lot of debate about reverse mortgages. That’s because many homeowners are hit with reverse mortgage fees that they didn’t expect.
If you’re thinking about getting a reverse mortgage, you’ll want to know what the fees are and why a reverse mortgage makes sense for you.
Keep reading to learn the true cost of a reverse mortgage.
What Is a Reverse Mortgage?
It’s easy to be confused by reverse mortgages. When you think about mortgages, you think of a bill that you pay every month for 30 years. As you make your mortgage payments, you build equity. For many people that home equity is the largest source of wealth.
A reverse mortgage is a loan against the equity you have in your home. You can use the loan for just about anything, from paying bills to travel costs.
You pay off the loan when you don’t live the home any longer, which can be when you pass away or when the home is sold. When you pay the loan back through a home sale, you won’t get the full proceeds of the sale. A good portion of the sale could go towards the reverse mortgage.
Reverse Mortgage Fees
One of the caveats about getting a reverse mortgage is that there are a number of responsibilities that come with the reverse mortgage. You still have to pay property taxes, home maintenance, insurance.
That starts by knowing what the reverse mortgage fees are. You should note that some of these fees can be rolled into your reverse mortgage loan.
If you decide to roll the costs into your loan, you end up with less equity in your home and the amount of money you get will diminish.
One of the most interesting things about a reverse mortgage is that you don’t pay it down every month as you do with a traditional loan. The interest is tacked on to your balance every month, so the cost of your loan goes up each month.
When the loan is paid off through a sale, you can be surprised by how much interest is added to the balance of the loan. That will decrease the overall equity you have in your home.
You want to check to see if your reverse mortgage has a fixed interest rate or if it adjusts on a monthly basis.
Loan Servicing Fees
On top of your monthly interest fees, lenders will add loan servicing fees each month. These fees can be as much as $35 a month for the ability to have a loan.
The amount lenders charge will depend on how interest is calculated each month.
The reverse mortgage industry is full of fraud and uncertainty. There are too many companies that look to take advantage of vulnerable seniors. At the same time, a reverse mortgage can bring financial relief, so it helps to be aware of the fees and choose your loan carefully.
One way to protect yourself is to use a reverse mortgage lender that only deals with Home Equity Conversion Mortgages (HECM), which are backed by the government’s FHA program.
In order to qualify for one of these loans, you have to go through a financial counseling program. That ensures you understand everything about your loan before you sign for it. The counseling program costs between $100-$150.
Mortgage Insurance Fees
Lenders will require that you have mortgage insurance. This will cost about 2% at closing, and you’ll have ongoing insurance costs, too.
You can expect to pay about half a percent of the mortgage balance each year for the mortgage insurance premium. You may have to have a separate FHA insurance policy. That will protect you in case you don’t receive your mortgage payments.
Loan Origination Fees
When you first purchased your home, you became familiar with closing costs and loan origination fees. These fees also exist when you get a reverse mortgage.
This is true with all lenders, even those that provide HECM loans. You’ll be asked to pay between $2,000 and $4,000, depending on the value of the home.
In order to determine the value of the home, you need to have an appraisal. That is your responsibility and they’re required by the government to get a HECM loan.
This is an upfront cost that can be about $500, depending on your location and the size of your home.
Additional Closing Costs
You’ll have your standard closing costs for the mortgage, which can easily add up. Lenders will perform a title search, check your credit, and ask for title insurance. These are all fees that will be passed over to you at closing.
These costs will vary by lender. Lenders should be able to give you an itemized list of these costs. Be sure to ask for the itemized list to ensure that you’re not paying more than you should.
Understanding Reverse Mortgages
Getting a reverse mortgage can be a financial lifeline for those who have equity in their home. That equity can be turned into much-needed cash to take care of basic expenses.
You do need to be aware of all of the reverse mortgage fees before making such a big decision. There are fees to close the deal and there are monthly fees, that will increase the amount you owe. You can weigh the costs of the loan and determine if it’s a good financial move.
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