Homeowners from age 62 and above use the equity in the home as a financial solution for later life expenses above what standard income can handle. These are available for people whose houses are paid in full or with considerable equity in the home from which they can draw tax-free funds to supplement and repay once the home is eventually sold or they leave the household. While these mean to benefit the borrower, there must be careful forethought and planning when considering the choice. The homeowner might not be aware of the costs associated with borrowing from their home; read here for details.
The borrower won’t make payments to the lender to repay the loan’s principal. Instead, the lender will make payments to the homeowners.
Still, that doesn’t account for the fees, charges, and loan expenses, including exceptional closing costs, homeowners’ insurance, property taxes, home maintenance, and other ongoing charges that need to be handled while in the home.
The interest will accrue monthly. The loan needs to be repaid after the homeowner dies, sells the house, or leaves the household.
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How Do Reverse Mortgage Costs Work Including Closing
For eligibility for a reverse mortgage, homeowners need to be 62+ with a property they either own outright or have a substantial amount of the mortgage paid with no outstanding debt. The borrower needs to have the means to continue to pay the costs associated with owning a home, including property taxes, homeowners’ insurance, and association fees. The upfront costs when seeking a reverse mortgage are considerable, including the closing costs. Still, the suggestion is that most HECM mortgages let borrowers roll these into the cost of the loan instead of having to pay the expenses upfront. That substantially decreases the available funds received with the loan, however. Learn the good and bad of reverse mortgages at https://www.forbes.com/advisor/mortgages/is-reverse-mortgage-a-rip-off-or-good-idea/. What are some other HECM fees and charges you need to consider per HUD:
● MIP or Mortgage Insurance Premiums
At closing, homeowners will find the Mortgage Insurance Premium initially is two percent, and each year thereafter will equate to roughly 0.5 percent of the loan’s balance. The charge can be rolled into the loan in the same way as the closing costs to avoid having upfront costs.
● Origination fees
In order to process an HECM mortgage, providers charge two percent per $200,000 of the house value and then one percent for anything over that amount with a cap of $6000.
● Servicing charges
Lending agencies have the capacity to request a fee each month to monitor and manage the HECM for the loan’s life, but these are not to exceed $30 for fixed or loans that adjust annually or $35 for monthly adjusting rates.
● Third-party fees
Third parties involved in the loan processing have the opportunity to charge fees for things including home inspections, title search, appraisals, title insurance, credit check, or recording fees.
Borrowers need to remember that interest rates for these mortgages are often higher, adding to the overall costs. The variable determining the rate will include the homeowner’s credit score, the lender you use, and other determinators.
How Does It Work
The concept of a reverse mortgage is that a homeowner is able to draw from the equity accumulated in the home they have either paid off or almost fully paid off.
In borrowing the money, however, the loan is subjected to high closing costs and other charges and fees that can be rolled into the loan. This detracts from the funds you’ll actually receive from the reverse mortgage.
As it stands, homeowners will likely be unable to borrow the full value from the house despite it being paid in full. The “principal limit” allowed for borrowing will depend on “current interest rates, age of the borrower, the HECM loan limit, and the house’s value.”
A few things will contribute to a higher principal limit, including the value, the older the borrower, and the less the interest rate. Click here for guidance on reverse mortgages.
Complete the reverse mortgage application
You can also go for refinancing into a new reverse mortgage with a better offer or into a much more conventional loan that you could use to settle your old mortgage balance. However, this would mean making monthly payments again. (If you go for this option, you can use our guides to the best mortgage lenders or refinance lenders to start your search.)
Another option is to refinance the reverse mortgage into a conventional loan. The loan will pay off your reverse mortgage and you’ll go back to making monthly mortgage payments. This can help you preserve and grow the equity in your home and helps your heirs avoid any reverse mortgage-related problems if you pass away. Again, keep in mind that there are closing costs associated with this type of refinance and you’ll need to make monthly payments on your loan. Before choosing this option, make sure you can afford it.
One of the easier ways to get out of a reverse mortgage is to sell the house and use the proceeds from the sale to pay off the loan. Depending on what you owe, you’ll keep any of the remaining sale proceeds after you pay off the loan. So, if you owe $150,000 on the loan and sell the home for $200,000, you’ll pay off the loan first, then keep the remaining $50,000.
A reverse mortgage offers senior homeowners the opportunity to supplement retirement income, handle unexpected, unavoidable expenses over and above monthly obligations, contribute to medical expenses, or pay for household maintenance costs.
It’s wise for a potential borrower to speak with an approved counselor through HUD, which is a requirement when going for an HECM. The counselor will help you navigate the pros and cons to determine the impact for you and your heirs.
A priority is to shop lenders when considering the option in order to achieve the best deal. If you don’t feel comfortable or aren’t versed in the complexities that come with financial solutions like reverse mortgages, it’s wise to have someone accompany you to the counseling and with loan shopping.
The individual(s) can then translate the information into more understandable language for the borrower