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.
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).