Plans are not fixed and once you choose a reverse mortgage plan, you can switch to another plan for a small fee.
Costs of a Reverse Mortgage
Because a reverse mortgage is a loan, you will be charged closing costs, interest on the money borrowed, and a servicing fee. For closing costs, you generally need to pay an origination fee to the lender for processing the loan and fees to third parties for such services as an appraisal, title search, survey, inspection, and recording the transaction. Once the loan is closed, the lender or servicer of the loan generally will charge a servicing fee, which cannot exceed $35 a month for HECM loans. You also have to pay a mortgage insurance premium. This insurance is collected to ensure that all borrowers will receive the funds promised to them, regardless of how long they live, and to compensate lenders for their losses if, when the loans are repaid, they receive less than what was loaned. Most of the costs can be financed with the reverse mortgage so you don’t have to pay for them out of pocket.
The costs of a standard HECM are typically more than for a traditional mortgage. However, there is an alternate type of HECM available, the HECM Saver, that charges a lower mortgage insurance premium. The amount that can be borrowed under an HECM Saver is less than under a standard HECM, but it can be a good cost-saving option for those who are not looking to take out a significant amount of equity.
While fixed-rate programs are available, most HECM lenders charge a variable interest rate. The interest rate is determined based on the current U.S. Treasury Security Rate or London Interbank Offered Rate (LIBOR) plus a specific margin. You can choose an interest rate that adjusts once a month or once a year. The interest rate with a monthly adjustment is usually lower than for a yearly adjustment, but the cap (the amount the interest rate can change) is higher. With a monthly adjustment, the cap is a 10 percentage point increase over the life of the loan. With a yearly adjustment, the cap is two percentage points per year and five points total over the life of the loan. A lender must disclose to you the TALC “total annual loan cost”. Because your balance grows over time due to not making payments, the interest you are charged grows as well. This is opposite from what happens in a traditional mortgage, where the interest charged decreases over time because the loan balance lowers.
Repayment of Loan
In general, while you are living in the home, you do not have to make any payments on the reverse mortgage loan. The loan is not due until everyone on the title of the house has not lived in the house for six consecutive months (or 12 months if gone for medical reasons) or died. It is standard for the lenders to give the borrowers or heirs six months to repay the loan or sell the house before starting foreclosure proceedings. However, in some special circumstances your loan may become due while you are still in the house. These circumstances can include:
- Failure to pay property taxes or insurance.
- Failure to maintain and repair home.
- Donation, condemnation or abandonment of home.
- Declaration of bankruptcy.
- Perpetration of fraud or misrepresentation.
- Renting out part of or the entire home.
- Adding a new owner to the home’s title.
- Changing the home’s zoning classification.
- Taking out new debt against the home.