The Hidden Fees: Reverse Mortgages

Reverse mortgages are advertised as a no worry, no stress, no liability way to access serious money fast. They are advertised so well that many people feel like reverse mortgages are too good to be true. And in reality, the freed up funds are usually accompanied by undisclosed costs, fees, and liability.

If you’ve ever been intrigued by the idea of a reverse mortgage, you may have had the following questions nagging you: What are these hidden costs and fees? Are there any fees that I will continue to pay? How will I be able to afford them?

The hidden fees

Closing costs — $1000-3000
These are estimates for the fees regarding documents and inspections needed. They depend on location, size of home, and individual agencies. Although all are not required for each situation, these are some of the documents you may need:

• Appraisal fee — $300-500 depending on location. $100-150 if follow up visit is required.
• Credit report fee — $20-60
• Flood certification fee — $15
• Escrow fee — $150-800
• Document prep fee — $75-100
• Recording fee — $50-400
• Courier fee — $50
• Title insurance — $500-2,000
• Pest inspection — Free-$100
• Survey — $100-250
• Counselor fee — $125

Initial Mortgage Insurance Premium — 2 percent of the maximum claim amount
This fee is charged by the government and is in place to ensure that your reverse mortgage company as well as you are not going to lose your money if the housing market crashes.

Origination fee — $2,500-6,000
These vary, but they are all capped by the FHA, so no one can go higher than these rates. To calculate your maximum origination fee:

• If your home is under $125,000, the fee has a maximum cost of $2,500.
• If your home is between $125,000 and $200,000, the deal is 2 percent of the property.
• If your home is over $200,000, then the company can charge 2 percent on the first $200,000 and then only 1 percent on anything over that.

For example, if you own a home that is $500,000, you would be charged 2 percent for the first $200,000 and then just 1 percent on the remaining $300,000.

Note: The FHA also has a limit of $6,000 on an origination fee, meaning no company can charge more than $6,000 for this fee.

Ongoing fees

Mortgage insurance premiums — Although you already paid the initial payment for this insurance, this is an annual bill that is 0.5 percent of the outstanding loan balance. While this does not have to be paid until after you sell the home, just know that it is slowly building each year.

Interest — Interest is paid on your loan and is required to be paid at the end of a loan. Interest rates can change from company to company but there are two types of interest rates that you can have:

• Fixed interest rate: The interest rate will not change for the entire life of the loan.
• Variable interest rate: The interest rates will change over time. Depending on your plan, this rate can change monthly or yearly. A rate will usually be capped at 5-10 percent, depending on the company.

Traditional home costs — Although you are getting a reverse mortgage and will most likely not need to pay mortgage costs anymore, that does not mean that you do not have to pay for your other house payments. You still must pay property taxes, insurance, and maintenance costs. Those who fail to pay their traditional home costs are still in danger of foreclosure. You will also pay a monthly servicing fee, usually around $30, for someone to make sure that you are up to date on your payments.

How can I afford to pay these fees?

Most of these fees can be financed by the proceeds of the loan. Although you will receive less money from the loan, these expenses do not have to be paid out of pocket.

Reverse mortgages are not free, are not without risk, and have a variety of fees, but they are still an option. Many people have been able to prosper because of them. If you think a reverse mortgage may be the right answer for your situation, go into the process with your eyes wide open. Be smart, be curious, and be safe, making sure to look at different companies rates, fees, and plans.