Financial Literacy - Smart Borrowing
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The ins and outs of reverse mortgages

Insurance premiums, other fees

FHA-backed reverse mortgages require lenders to collect insurance premiums.

Borrowers will pay 2 percent of the lesser of your home's value or the FHA HECM mortgage limit for your area upfront, plus a 0.5 percent annual premium that is accrued on a monthly basis and added to the outstanding balance.

Borrowers should also expect to pay for an appraisal, credit report, title insurance, legal fees and recording fees -- just as they would for any other mortgage.

Origination fees can also add up quickly and reduce the overall amount of money available to you at closing. Lenders can charge up to $2,500 for homes valued at less than $125,000. Above that amount, lenders can charge 2 percent of the first $200,000 of your home's value plus 1 percent of the amount over $200,000. HECM origination fees are capped at $6,000.

The new housing rescue law limits the fees for HECM reverse mortgages to 2 percent of a loan up to $200,000, plus 1 percent of any portion greater than $200,000. Origination fees are capped at $6,000, but in the future this cap will be indexed to inflation.

Nevertheless, on a $200,000 loan, that's $4,000 in origination fees in addition to other loan costs.

"Reverse mortgages traditionally have been very restrictive and pretty costly," says Paula de Vos, a Certified Financial Planner and president of Synergist Wealth Advisors in Carmel, Calif.

Borrowers should fully understand the loan documents before they sign because they are in fact legal documents that could affect your heirs, de Vos says.

"If you don't fully understand what is being proposed, seek the counsel of someone who does."

The service fee set-aside

Another confusing, yet costly, add-on for HECM reverse mortgages is the service fee set-aside, or SFSA.

The service fee set-aside is an estimate of total servicing fees over the life of the loan. Although not considered a closing cost, the SFSA can amount to thousands of dollars that will reduce your available loan proceeds.

The SFSA is not an actual fee but a calculation using complicated algorithms that factor in a borrower's estimated life expectancy among other things. Most lenders assume a life expectancy of 100 years for SFSA calculation purposes. The result is a fee charged by the loan servicer that ranges from $20 to $35 per month.

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The SFSA is not tallied until the borrower dies or moves and the loan becomes due.

For example, if a borrower is 65 years old, he potentially has 35 years, or 420 months, of life remaining.

If the SFSA is $30 per month, that equates to $12,600 in set-aside fees that will be reduced from your loan total.

However, if you move or sell your home within, say, eight months, you would actually owe only $240 ($30 x 8).

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