Reverse Mortgage Fees and Reverse Mortgage Rates

Do Reverse Mortgage Costs Make This Product Too Good to Be True?

Many people are concerned about the costs associated with a Reverse Mortgage. However, if you want or need equity from your home, are not willing to relocate to a smaller home, don’t want to face regular loan payments and you are comfortable reducing the size of your estate left to your heirs, then the upfront costs of a Reverse Mortgage should not be a significant issue.

Reverse Mortgage fees are generally only a disadvantage if you intend on moving out of the house in a short period of time. And while Reverse Mortgage interest rates can be high, the fees and interest are not a burden to the homeowner since they are usually financed by the Reverse Mortgage itself (so there are not any out of pocket expenses).

But, no matter how you justify them, Reverse Mortgage costs do indeed amount to a significant sum and so in this article we will help you to understand:

• The different types of Reverse Mortgages and how to choose a Reverse Mortgage lender
• How each Reverse Mortgage program calculates loan amounts
• What kind of fees are associated with the different Reverse Mortgage programs
• How Reverse Mortgage interest rates are calculated
• Comparing Reverse Mortgage costs to other methods of getting money out of your home

To help explain these details we have created an example of a fairly typical Reverse Mortgage loan. This example shows the Reverse Mortgage loan amounts, charges and interest rates for a 70 year old retiree living in Seminole County, Florida, with a $200,000 house, and a $50,000 mortgage.

After reviewing this article, use the Reverse Mortgage Calculator to see how much money you could receive from a Reverse Mortgage on your own home.

The Different Types of Reverse Mortgages and How to Choose a Reverse Mortgage Lender

There are three different Reverse Mortgage programs:

• The HUD HECM (Home Equity Conversion Mortgage)
• Fannie Mae Home Keeper™
• Proprietary, non-government reverse mortgages (such as the Financial Freedom Cash Account Advantage® used in the examples below).

Each of these loan programs has different fees and interest rates as well as varying lending limits. (A lending limit is the maximum amount of money available to a home owner under that particular Reverse Mortgage loan program.)

The really important decision for Reverse Mortgage loan customers is which loan program, not from whom you contract your loan. The maximum fees and lending limits for the HECM and Home Keeper Reverse Mortgages are set by law. Some discounting is allowed – a Reverse Mortgage lender can charge lower origination fees or lower monthly servicing fees – but it is unlikely that shopping would result in more than about a $200 -- $300 discount.

Your Reverse Mortgage lender can be any HUD approved broker.

How Reverse Mortgage Loan Amounts Are Calculated

The different Reverse Mortgages -- HECM, Home Keeper and the proprietary -- in this example the Financial Freedom Cash Account Advantage® – each use location, the homeowner’s age, prevailing interest rates, the appraised value of your home and liens or mortgages on your home to determine your loan amount.

However, each program weights the criteria differently in their individual formulas. And so, as you will see below, the amounts of money available to the homeowner varies widely between the programs.

To begin with, let’s compare the appraised value of the home and the loan amount (before fees) available to this Florida home owner:

Comparison of Loan Amounts Available on a Florida Reverse Mortgage *

HECM Home Keeper Cash Account   Maximum Loan Principal: $120,600* $68,418* $81,539*

* On a $200,000 house owned by a 70 year old retiree; this amount will also vary based on county and current interest rates.

As you can see, the size of the loans varies greatly. The HECM is the most popular type of Reverse Mortgage largely because it offers the highest loan amounts for homes of average value. (High value homes typically get the largest loan amount from the proprietary type of Reverse Mortgage.)

The Fees Associated with Reverse Mortgages and the Actual Amount of Money Available to the Homeowner

Now that we have an initial starting point for this Florida Reverse Mortgage, we can calculate the various fees this Reverse Mortgage sample client could expect to finance in the loan.

Comparison of Reverse Mortgage Fees

HECM Home Keeper Cash Account   Origination Fee: $4,000 $4,000 $4,000 Mortgage Insurance Cost: $4,000 $0 $0 Third Party Closing Costs (est): $2,200 $2,200 $2,200 Service Fee Set-Aside: $5,345 $4,841 $0 (see below)   TOTAL FEES: $15,545 $11,041 $6,200   Loan Amount After Fees: $105,055 $57,377 $75,339

NOTE: Two of the three cash account payout options will waive the origination fee.

You’ll notice that the HECM has the highest amount of total fees, but still offers the biggest loan amount.

An explanation for each fee follows below:

• Origination Fee:

  The Origination Fee is the upfront fee charged by the Reverse Mortgage lender to initiate the loan. For the HECM, the origination fee is the greater of $2,000 or 2 percent of the maximum county FHA loan limit. For the Home Keeper™, the origination fee will not exceed 2 percent of the value of the home. For the Cash Account Line of Credit option, the fee is 2 percent of the Initial Cash Advance Limit. With all of these programs, the entire amount of the origination fee may be financed as part of the mortgage.

• Mortgage Insurance Cost:

  Mortgage insurance costs are unique to the HECM product. HUD guidelines require that all HECM reverse mortgage borrowers receive Reverse Mortgage insurance, which guarantees that you will continue to receive benefits no matter what happens to your investor and ensures you will never owe more than the value of the home. The Mortgage Insurance Premium is 2 percent of the maximum county FHA loan limit, or home value (whichever is less) plus an annual premium of 0.5 percent of the loan balance.

• Third Party Closing Costs:

  Third Party Closing Costs represent a number of services that may need to be undertaken before the reverse mortgage can be finalized. These can include appraisals, title searches, surveys, inspections, recording fees, local, state, and federal mortgage taxes, and credit checks. As these fees vary from place to place and by vendor; the amount quoted above is an average.

• Service Fee Set Aside:

  The Servicing Set-Aside is an amount of money taken out of the loan funds to cover the future costs of monthly service fees charged to the loan. Typically these fees are between $20 and $35 dollars; capped by the federal government. Unlike the other costs financed in the loan, the Servicing Set-Aside is not added to the principal of the loan initially, but on a month-by-month basis as the monthly fee is applied. The Cash Account Advantage program does not have a Servicing Set-Aside fee, but the Monthly Service Fee is added to the balance of the loan automatically.

Cash Available to Borrower After Fees and Payoff of Liens

Following the deduction of the upfront fees and the payoff of the existing mortgage (a Reverse Mortgage borrower must always pay off any existing mortgages and other liens against the home), the borrower in our Florida Reverse Mortgage example is left with the following amounts available in the form of lump sum cash payment, line of credit, or the equivalent monthly payment for life.

HECM Home Keeper Cash Account Final Loan Balance (after fees): $105,055 $57,377 $75,339 Existing Mortgage: $50,000 $50,000 $50,000   Amount Available to Borrower: $55,055 $7,377 $25,339

How Reverse Mortgage Interest Rates Are Calculated

Although you may be concerned about the fees on a Reverse Mortgage, the highest cost associated with this product is interest. The good news is that the interest payments are added on to the principal of the loan, and no payments are due until the borrower leaves the property on which the reverse mortgage has been placed. Best of all, the amount due on a Reverse Mortgage will never exceed the value of the property.

Method of Calculating Interest Rates

All the reverse mortgage products have interest rates that float on a base of an established benchmark interest rate index and adjust periodically within maximum allowed adjustments and within interest rate caps.

The table below shows how each Reverse Mortgage loan program calculates interest.

HECM Home Keeper Cash Account Index Base Rate 1-year Treasury Bill (T-Bill) 1-month Certificate of Deposit (CD) 6-month London InterBank (LIBOR) Margin 3.1% for Annual Adjustable Rate Option OR 1.5% for Monthly Adjustable Rate 3.4% 3.5% Periodic Rate Adjustments 2% max. Annual Adjustable Current T-Bill Rate plus Margin for Monthly Adjustable Monthly Once every six months Interest Rate Caps Initial fully indexed rate + 5% For Annual Adjustable OR Initial fully indexed rate + 10% For Monthly Adjustable Initial fully indexed rate + 12% Initial fully indexed rate +6%

Index Base Rate: The Index Base Rate is the interest rate of the publicly published financial index upon which the Fully Indexed Rate is based. These rates fluctuate over time. Each loan program uses a different indexed rate.

Margin: The margin is the lenders’ profit margin above the value of the publicly published financial index. The margin for the HECM and Home Keeper™ is set by law.

Periodic Rate Adjustments: Periodic Rate Adjustments refers to the periodic adjustment to the Fully Indexed rate. The adjustment period varies by product, monthly, bi-annually or annually. The adjustment amount is the difference between the Index Base Rate at the beginning of the period and the Index Base Rate at the end of the period.

Interest Rate Caps: Interest Rate Caps are a preset maximum Margin used to calculate the maximum Fully Indexed Rate of the reverse mortgage loan. The loan may or may not reach this maximum depending on the change in Index Base Rate.

Interest Rates for Florida Reverse Mortgage Example

To see the interest rates that the Florida Reverse Mortgage client would be charged, we have assumed that the current baseline interest rates are as follows (these are close to the actual rates in the Fall of 2006):

• One Year Treasury Bill (T-Bill): 5.00%
• One Month Certificate of Deposit (CD): 5.25%
• Six Month London Interbank Offer Rate (LIBOR): 5.50%

Assuming these Index Base Rates, each loan program would charge the following Fully Indexed Interest Rates.

HECM Home Keeper Cash Account Initial Fully Indexed Rate 8.1% Annual Adjustable 6.5% Monthly Adjustable 8.65% 9% Maximum Fully Indexed Rate 13.1% Annual Adjustable 16.5% Monthly Adjustable 20.65% 15%

Initial Fully Indexed Rate: This is the actual interest rate charged at the beginning of the loan, calculated by adding Index Base Rate + Margin = Fully Indexed Rate.

Maximum Fully Indexed Rate: This is the maximum actual interest rate that could be charged, calculated by adding Index Base Rate + Margin + Maximum Periodic Rate Adjustments = Maximum Fully Indexed Rate. Fully Indexed Rates will likely go up and down over the life of the loan and may or may not reach the Maximum Fully Indexed Rate allowed under the program’s interest rate cap.

Interest Rate Charges for Florida Reverse Mortgage Example

If interest rates didn’t change for a year, the interest expense in the first year of the loan for each option in our Florida example would be approximately:

HECM Home Keeper Cash Account Initial Loan Principal: $120,600 $68,418 $81,539 Initial Fully Indexed Rate: 8.1% Annual Adjustable 6.5% Monthly Adjustable 8.65% 9%   1st Yr Interest Expense $9,769 Annual Adjustable $7,839 Monthly Adjustable $5,918 $7,339

The HECM has the highest interest payments in this example because it offers the largest loan amount against which the interest is charged.

However, it is likely that the HECM is the most popular Reverse Mortgage program because it offers both:

• The highest loan amounts to the borrower
• The lowest maximum fully indexed rates with the annual adjustment option.

The maximum fully indexed interest rates and interest payments can be a considerable drawback for Reverse Mortgage borrowers. However, Reverse Mortgages have a significant advantage. Interest payments are added on to the principal of the loan (with no payments due until the borrower leaves the property) and the amount due on a Reverse Mortgage will never exceed the value of the property.

Comparing Reverse Mortgage costs to other methods of getting money out of your home

A Reverse Home Mortgage is not the only way to cash in on your home in retirement. Other ways of getting money out of your home include:

• Home Equity Loans
• Downsizing

Comparing Reverse Mortgages to Home Equity Loans

There are a variety of home equity loans that you can use to access your home equity to help you fund your retirement. You are probably familiar with these programs:

• Cash-out mortgage refinance with either fixed rates or adjustable rates (i.e. refinancing your first mortgage)
• Home equity loans (also known as a second mortgage)
• Home Equity Line of Credit

The initial interest rates on most home equity loan products are slightly lower than those charged by Reverse Mortgage loan products. For example, in the fall of 2006, the current interest rates for other equity based loans were approximately:

• 6 percent initial fully indexed rate with a maximum fully indexed rate of 11 percent for the most popular adjustable rate mortgage refi (the 5/1 ARM refi, fixed for five years and adjustable thereafter)
• 6 percent for a thirty year fixed 1st Mortgage
• 7 percent variable for a $30,000 Home Equity Line of Credit. Typically the Index Base rate is the Prime Rate.
• 7.5 percent fixed rate for a $30,000 Home Equity Loan (2nd Mortgage)

While home equity interest rates can be lower than those charged on Reverse Mortgages, the primary disadvantage of home equity loans is that you will have to make loan payments and if the rate is variable, those payments can increase dramatically. This is often difficult for retirees living on a fixed income. It is also possible to default on a home equity loan and lose your home.

Click here for more information on home equity loans.
Click here for information on equity based loan interest rates

Comparing Downsizing to a Reverse Mortgage

In many cases downsizing can be the most economically efficient way of securing money from your home in retirement. However, the costs of moving are impossible to generalize.

It might be worth your while to consider how much you might be able to sell your house for and how much less you could by another house for. If considering downsizing, you will also want to factor in the costs of using a realtor to sell your existing house and buy a new house and moving costs as well as the emotional attachment you have to your existing home.

Click here to learn more about downsizing.

Compare Reverse Mortgage Loans and Reverse Mortgage Loan Rates for Your Own Home

The NewRetirement Reverse Mortgage Loan Calculator enables you to find out how much money is available to you from your own home. Visit the Reverse Mortgage Calculator here.