Many people are concerned about the costs associated with a Reverse Mortgage, as well as the impact interest rates have on both how much can be borrowed now and the future balance owed.
However,
- if you want or need equity from your home — either now or perhaps during an emergency,
- are not willing to relocate to a smaller home,
- don’t want to or are unable to face regular loan payments, and
- 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.
Additionally, understanding how interest rates — as well as home appreciation — impact future home equity can help alleviate concerns (or at least help you better understand how it all works).
Reverse Mortgage fees are generally only a disadvantage if you intend on moving out of the house in a short period of time. While Reverse Mortgage interest rates and fees can seem high and do indeed amount to a significant sum, the costs 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).
In this article, we will help you to understand:
To help explain these details, we 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, with a $300,000 house and a $50,000 mortgage.
After reviewing this article, use a 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 is currently only one Reverse Mortgage type that is widely available — the HECM Reverse Mortgage. This loan can be used on your existing home or to purchase a new home. Depending on how you take your loan amount, you can opt for either a fixed rate Reverse Mortgage (meaning the interest rate never changes as long as you hold the loan) or an adjustable rate Reverse Mortgage (your interest rate can go up or down and are tied to current market rates).
HECM programs are available from HUD-approved lenders. These lenders must adhere to the rules and regulations structured by Congress. The maximum fees and lending limits for the HECM are set by law.
Additionally, there are a growing number of proprietary products being offered directly by lenders, such as Jumbo Reverse Mortgages. These loan options typically do not have the same costs or restrictions as HUD HECM programs, and they allow high home value homeowners to access more of their home equity..
In most cases, the HECM is the most widely available and appropriate option. But, if you have a higher home value or perhaps want to access a reverse line of credit on top of your existing mortgage, you may want to consider proprietary offerings. Also, in some states there are proprietary options for higher value condominiums that are not FHA-approved for the HECM program.
How Reverse Mortgage Loan Amounts are Calculated
HUD-approved lenders will determine your actual loan amount by using:
- The loan limit, also known as the lending limit, is the maximum home value used to calculate the loan amount
- The value of your home — as determined by an appraisal
- Prevailing interest rates
- The amount of any outstanding loans against your house
- Your age and the age of any other titleholders
The HECM lending limit nationwide is set at $970,800 for 2022. As the HECM Reverse Mortgage program is administered by the Department of Housing & Urban Development, legislation may increase (or decrease) this amount in the future. When calculating your loan amount, lenders will use the lesser of your home value or this lending limit.
Loan Amounts Available on a Typical Reverse Mortgage
In the following sections, we detail Reverse Mortgage loan amounts, fees, and interest expenses for a fairly typical homeowner.
Using the sample data listed above and rates at the time of article publication, a borrower may expect the following:
| Adjustable Interest Rate | Fixed Interest Rate |
|---|
| Maximum Loan Principal (loan principal limit): | $159,000* | $147,900* |
* On a $300,000 house owned by a 70-year-old retiree using Jul-2021 rates; this is the gross amount available prior to deducting existing mortgages, the origination fee, mortgage insurance and other closing costs that vary based on company margin and current interest rates.The Fees Associated with a Reverse Mortgage and the Actual Funds Available to the Homeowner
Now that we have an initial starting point for this Reverse Mortgage, we can calculate the various fees this sample client could expect to finance in the loan.
Reverse Mortgage Fees
| Adjustable Interest Rate | Fixed Interest Rate |
|---|
| Origination Fee: | $5,000 | $5,000 |
| Mortgage Insurance Premium: | $6,000 | $6,000 |
| Third Party Closing Costs (est): | $3,026 | $3,026 |
| TOTAL FEES: | $14,026 | $14,026 |
| Loan Amount After Fees: | $144,974 | $133,874 |
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. The entire amount of the origination fee may be financed as part of the mortgage.
- Mortgage Insurance Premium: Mortgage insurance costs are unique to the HECM product. HUD guidelines, last updated in Oct-2017, 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 loan holder, and ensures you will never owe more than the value of the home at the time you repay the Reverse Mortgage. The amount charged is 2% of the maximum claim amount at closing, and in subsequent years, servicing mortgage insurance premium (MIP) is 0.5% of the loan balance annually. Proprietary loans, such as Jumbo Reverse Mortgages, do not require mortgage insurance.
- 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 approximate average. Some lenders may charge higher while others lower.
Paying Off Existing Liens — No More Monthly Mortgage Payments
For many borrowers, the number one benefit of securing a Reverse Mortgage is eliminating ongoing traditional mortgage payments. If you have an existing mortgage — or any other liens against your home — they must be paid off using the funds from your Reverse Mortgage. You may not have both a traditional mortgage and a Reverse Mortgage at the same time.
Eliminating your traditional mortgage payments can be an excellent way to improve your monthly cash flow in retirement.
In this example, the $50,000 mortgage is paid off — leaving a sum of money that can be used as the homeowner sees fit — depending on the type of loan that has been chosen.
| Adjustable Interest Rate | Fixed Interest Rate |
|---|
| Net Principal Limit (Net balance after fees): | $144,974 | $133,874 |
| Less Current Debt Payoff: | $50,000 | $50,000 |
| Remaining Money: | $94,974 | $83,874 |
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 Reverse Mortgage example is left with the following amounts available in the form of lump sum cash or line of credit.
| Adjustable Interest Rate | Fixed Interest Rate |
|---|
| Remaining Money After Paying Off Fees: | $94,974 | $83,874 |
| Less Upfront Cash: | $0 | $24,714 |
| Max Upfront Cash Available: | $31,374 | $24,714 |
| Fixed-Rate Unusable Funds: | n/a | $59,160 |
| Maximum Line of Credit (less any upfront cash): | $94,974 | $0 |
The amount of cash available and when it is available to a Reverse Mortgage borrower varies depending on the type of loan you receive.
Adjustable Rate: With an adjustable rate Reverse Mortgage loan, the borrower must put all funds that are available after the payoff of liens into a line of credit or a tenure (monthly payments). A portion of the line of credit is considered immediately available (Max Upfront Cash).
There are two main advantages associated with the line of credit option:
- You only pay interest and annual mortgage insurance premiums on the funds you withdraw, not the total amount that is available to you.
- The total amount available to borrow increases each year at a fixed rate. Until you fully use your line of credit, the amount you can access continues to increase as you age giving you additional borrowing potential.
In this example, the borrower has a total of $108,774 in money available to them — to be used in anyway they wish. However, this borrower is only allowed to withdraw $39,654 (60 percent of their loan principal limit minus the mortgage payoff amount and closing costs) in the first year of the Reverse Mortgage. The remaining $69,120 (plus annual increases) can be tapped thereafter.
Fixed Rate: With a fixed rate loan, the cash you can access from the loan is more limited. If you opt for a fixed rate loan, you are only allowed to withdraw 60 percent of your principal limit. (In this example, 60 percent of $147,900 minus $50,000 mortgage and $14,026 closing costs comes out to $24,714.)
The unusable funds will just remain as your home equity.
Estimate Your Loan Amount
Monthly Payments Available to Borrower After Fees and Payoff of Liens
Instead of cash, a Reverse Mortgage borrower may opt to receive monthly payments for their lifetime — but only if they opt for the adjustable rate loan. Monthly payments are not available for the fixed rate Reverse Mortgage.
| Adjustable Interest Rate | Fixed Interest Rate |
|---|
| Remaining Money After Paying Off Fees: | $94,974 | $83,874 |
| Monthly Lifetime Cash Payments: | $223 | n/a |
Monthly lifetime payments can be an excellent way to supplement your lifetime income.
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.
Method of Calculating Interest Rates
Interest rates for a Reverse Mortgage float on a base of an established benchmark interest rate index and adjust periodically within maximum allowed adjustments and within interest rate caps.
The bullets below show how the HECM Reverse Mortgage loan program calculates interest.
- 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.
- Margin: The margin is the lenders’ profit margin above the value of the publicly published financial index. The interest rate margin is bounded by maximums and minimums, but varies company by company.
- MIP Margin: In addition to the upfront fee, all HECM Reverse Mortgages involve an annual margin applied towards premiums for federal Mortgage Insurance. As of July-2021, this MIP is 0.5% of the loan balance.
- Periodic Rate Adjustments: Periodic Rate Adjustments refers to the periodic adjustment to the Fully Indexed rate. It applies only to Adjustable Rate Reverse Mortgage programs.
- 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.
- 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. Depending on whether you select an annually or monthly-adjusting interest rate, the cap on your interest rate will be different.
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, even if the property decreases in value over the lifetime of the loan.
Comparing Reverse Mortgages to Home Equity Loans and More
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:
I. Downsizing
II. Home Equity Loans
- Cash-out Mortgage Refinancing with either fixed or adjustable rates (refinancing your first mortgage)
- Second Mortgages
- Home Equity Line of Credit
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 adjustable, those payments can increase dramatically if interest rates go up. 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.
Comparing Downsizing to a Reverse Mortgage
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 and declining home values or a soft real estate market may make your home difficult to sell.
Nonetheless, 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 buy 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.
Explore Your Options
See how downsizing, getting a reverse mortgage, or refinancing could impact your retirement plan by using our retirement calculator and going to the Housing section.
Find Out How Much Money is Available to You with a Reverse Mortgage
It’s easy to use our Reverse Mortgage Calculator to see quickly how much you may be able to access, as well as access additional resources and connect with a prescreened HUD approved Reverse Mortgage lender to get answers to all your questions — including current interest rates and fees.
