Upfront Costs Associated with obtaining a Reverse Mortgage
A frequent question that I am asked pertains to the costs associated with obtaining FHA’s Home Equity Conversion Mortgage (HECM) program otherwise known as a reverse mortgage. As I have mentioned time and time again, obtaining a reverse mortgage can “literally” be a life changing event. However, like you would anything, you need to do your research before deciding to move forward. As I am sure you will encounter lots of different explanations on upfront reverse mortgage costs, I am going to try to be as straightforward as possible.
To begin, a reverse mortgage is a loan so you will have normal costs associated with acquiring a loan. You will have your title fee, escrow fee, documentation prep fee, etc. You will also have to pay for an appraisal as well as your HUD counseling session which is typically around $125. Aside from these “customary” refinance fees, you will have to pay an upfront FHA mortgage insurance premium (“MIP”). The amount of the MIP depends on what percentage of your eligible principal limit you take as an initial disbursement. If you take 60% or less of your eligible principal limit at closing you will have to pay an MIP of .5%. However, if you take greater than 60% you will have to pay 2.5%. I know. That is a little hard to follow. Let me illustrate by providing you an example. Let’s say you have a home that appraised at $500k and the youngest borrower on the loan is 70 years old. The amount of your eligible principal limit is based upon the age of the youngest buyer and is represented by a percentage of the appraised value of your home or $625,500, whichever is less. In this case the appraised value is $500,000 which is less than $625,500 so we will use $500,000. The youngest buyer is 70 years old and the current principal limit factor for a 70 year old is .576 (there is a chart that determines this, I will explain this in a different blog). So if we multiply $500,000 by .576 we get an eligible principal limit of $288,000. In order to have a .5% MIP the initial disbursement cannot be greater than $172,800 ($288,000 x 57.6%). This includes any amount of money eligible to you in the first year as a HELOC. Confusing? It might seem that way but after I sit down with my clients and REALLY explain it on paper they usually get it.
So MIP is a fee that goes to HUD not to the broker or to the lender. At Frontier Loan Group, Inc. (“FLG”) if we see a possibility of lowering your closing costs by capping your initial disbursement funds we will present that to you as an option. However, sometimes it is impossible to avoid the 2.5% MIP. It all depends on what your initial principal balance is in relation to your eligible principle limit.
Other than MIP and standard closing costs you MAY incur an origination fee. The CAP on the amount that can be charged as origination is $6,000. At FLG we typically can avoid charging an origination fee (however, this depends on the amount of your initial disbursement). The reason that we can avoid charging an origination fee is because the lender typically pays FLG to originate the loan so, depending on the circumstances, we do not attempt to get “extra” fees by charging our borrowers an origination fee. With that being said, there might be times that FLG does charge an origination fee. That typically occurs when the initial disbursement is very low. For example, if a borrower lives in a house that is paid off and does not take an initial disbursement OR if the initial disbursement is in the form of a HELOC and no funds are taken at closing OR if the initial disbursement is nominal FLG may charge an upfront origination fee. However, if you have an existing note that will paid off as part of the reverse mortgage and that loan is greater than $150k, then, most likely, FLG will not charge an origination fee. Just keep in mind that origination fees are negotiable.
So, in conclusion, your costs should be restricted to normal refinance associated costs, MIP and MAYBE origination fees. Just so you know, those fees can be rolled up into the loan so they do not come out of your pocket. Keep in mind, that the appraisal fee and the HECM counselor fee has to be paid upfront.
Frontier Loan Group, Inc. is located in Carlsbad, CA but services reverse mortgage borrowers throughout the State of California. FLG is licensed by the California Bureau of Real Estate as a Real Estate Broker license #01449152 NMLS#345305. The CEO and broker of FLG is Michael Gaddis, J.D. who is also licesned by the California Bureau of Real Estate as a Broker license #01433800 NMLS# 280011. Michael Gaddis, J.D. is also the host of “The Michael Gaddis Show” on San Diego’s KCBQ AM1170 The Answer which airs on Wednesdays at 8PM. To listen to podcasts of “The Michael Gaddis Show” please visit http://am1170theanswer.com/pages/the-michael-gaddis-show. You can visit Frontier Loan Group, Inc.’s webpage at www.frontierloangroup.com or its Facebook page at www.facebook.com/frontierloangroupinc.
For more information on upfront reverse mortgage costs you can also visit the Consumer Finance Protection Bureau‘s (“CFPB”) webpage at http://www.consumerfinance.gov/askcfpb/1215/are-there-any-limitations-upfront-charges-bank-can-charge-reverse-mortgage.html or