More and more seniors are turning to reverse mortgages to supplement their retirement income. If you are considering making this move, you need to understand some of the options and the initial and recurring costs associated with them.
Most reverse mortgages are offered through the Federal Housing Administration’s Home Equity Conversion Mortgage program, and I would urge you to consider a reverse mortgage only if it is under this program’s auspices.
Aside from interest, there are three basic costs associated with a reverse mortgage: an origination fee, mortgage insurance costs, and closing costs. The entire amount of these fees may be financed as part of the mortgage. The origination fee is 2 percent of the loan amount up to $200,000, plus 1 percent of the loan amount above that level. The fee cannot be less than $2,500 or more than $6,000.
HUD guidelines require that all HECM mortgages be insured. For a standard HECM mortgage, the initial mortgage insurance premium cost is 2 percent of the appraised home value plus an annual premium of 1.25 percent of the loan balance. This requirement penalizes mortgage holders who take out a loan much lower than the home value. For an HECM Saver mortgage, the insurance cost is only 0.01 percent of the appraised home value or of the principal lending limit, whichever is less.
Closing costs include appraisals, title search, inspections, surveys, and so forth.
Like conventional mortgages, reverse mortgages can have either a fixed or an adjustable interest rate. The disadvantage of the fixed-rate mortgage is that you must take all of the proceeds in one lump sum, and interest accrues immediately. An adjustable-rate mortgage provides more flexibility because you can access multiple lump sums, regular multiple payments, or a credit line. However, the future rates of ARMs are unknown, and they can change monthly, possibly moving higher. Secondly, with a reverse ARM the initial mortgage insurance premium cost is based on the appraised home value, regardless of the original loan amount, and interest will accrue on that amount.
There is a significant advantage to the saver program, especially when there is a high appraised value. That program is preferable except when you cannot borrow enough for your needs.
Many specialists discourage borrowers from taking reverse mortgages because of the high up-front fees, the uncertainty regarding interest, and the loans’ inflexibility. Anyone considering a reverse mortgage should consider other alternatives such as downsizing, selling the home and renting, or a home equity loan.
One last caution: To avoid foreclosure, do not get a reverse mortgage unless you will be able to maintain your home and pay your real estate taxes and homeowner insurance.
Elliot Raphaelson Boston Globe May 24, 2011