One consistent question I get from people is “why are reverse mortgage upfront costs so high”? It can create an immediate distrust and people may feel that they are getting scammed.
Before I explain the upfront reverse mortgage costs, one thing people may not be aware of is that there are new low upfront cost reverse mortgages available but not all reverse mortgage lenders carry them and it’s important to note, not all reverse mortgages are the same and can have varying rules and guidelines.
As far as the upfront fees go I will provide an explanation, examples, and a 5-year time horizon in detail in a brief video link that has examples and numbers on the costs. I will be brief here in the article.
Most of the upfront reverse mortgage loan fees actually are the same as other mortgages loans. Title insurance, escrow fees, appraisal, credit report fee among others. But FHA upfront loan costs differ from other reverse mortgages due to the upfront M.I.P., mortgage insurance premium.
There are federally insured HECM reverse mortgages and non-HECM reverse mortgages that are not federally insured. The HECM requires M.I.P., mortgage insurance premium, protection on every loan and this insurance represents 80-85% of the upfront loan costs, which get rolled into the loan (not out of pocket).
So why is this insurance required on the HECM but not the non-HECM? Most people may not realize that the HECM is in the family of FHA loans. Every kind of FHA loan requires M.I.P. regardless how much equity you have in your property. Other types of FHA loans are the 3.5% down payment home purchase option, the 203k buy and rehab loan, energy efficient mortgage and others. They all require upfront and monthly M.I.P. as well although the percentage of upfront and monthly M.I.P. varies on each loan.
Most reverse mortgage applicants have not used FHA financing before, when they bought their home, so they’ve never paid M.I.P. They may have used conventional financing which requires P.M.I. private mortgage insurance, which is required when you have less than a 20% down payment. P.M.I. is synonymous with M.I.P. they do the same thing. The insurance covers the lender if you owe more than the property value when it comes time to sell the home. It’s similar to auto loan gap insurance.
But on a conventional loan the upfront P.M.I. cost required is a few months of premium rolled into your loan which may several hundred dollars.
The upfront FHA M.I.P. for a reverse mortgage is 2% of your home value with an $822,375 value cap. That’s a huge difference!
So for example on a $700,000 home value, as dictated by the appraisal, that’s a whopping $14,000 upfront cost that gets rolled into your loan amount. Add to that the additional normal loan fees I listed above and this figure can raise the eyebrows.
But again the insurance is not just charged on reverse mortgage loans, it’s on all FHA loans. To compare, using the FHA 3.5% down payment home purchase loan (not a reverse mortgage), the upfront M.I.P. cost is 1.75% of the property value, and that amount gets rolled into the loan balance.
Does this mean the lower upfront cost non-HECM is a better reverse mortgage option? Not necessarily. The non-HECM reverse mortgages come with a higher interest rate. Watch the I have provided 5 year comparisons on the HECM vs. the non-HECM. I think you may raise your eyebrows for a different reason when you see the numbers.
Also there are a few other major differences between the two loans, the non-HECM line of credit is open for only 10 years and can be closed due to declining property values at any time. The HECM line of credit stays open for life and can’t be closed due to declining property value. Also the HECM unused line of credit available grows every month, giving more access to funds if needed, I have created a separate video on how that works, click here to view that in depth video which is inside the blog post.
In conclusion the FHA HECM reverse mortgage does have more upfront costs than the non-HECM but you need to be presented a detailed comparison for both loans with time horizons to properly compare the two loans to determine which may fit your situation. To view the brief video link with more details, time horizon comparisons, and examples click here and always feel free to contact me or leave a comment or question below.
Best KW