If you decide to proceed with the loan, you now select a lender
and fill out a loan application. The person
you deal with will be called a loan originator
or reverse mortgage consultant.
Filling out an application does not obligate
you to take the loan. You will have
opportunities to change your mind. You
will be asked to select a loan payment
plan. Payment plans can be fixed monthly
payments, a lump sum payment, a line of
credit, or a combination of these.
The lender discloses the estimated total
cost of the loan, as required by the federal
Truth in Lending Act. The Truth in Lending disclosure specifically designed for a reverse mortgage is called a TALC, or Total Annual Loan Cost disclosure. It illustrates all of the costs of the loan based upon the loan being outstanding for three different durations of time.
The costs that the
lender will describe to you are capped
and may be financed as part of the reverse
mortgage. They can include the following:
Origination Fee
The origination fee covers a lender’s operating
expenses associated with originating the
reverse mortgage.
Under the HECM program, which accounts
for most reverse mortgages made in the
U.S. today, the maximum origination fee allowed is
2% of the initial $200,000 of the home's value and 1%
of the remaining value, with a cap of
$6,000. Some lenders waive or reduce the
origination fees on certain products.
(Note: Many of the calculations and fees on a HECM are based on the Maximum Claim Amount, which is the value of the home at the time of loan origination, but which currently has a maximum limit of $625,500.)
Mortgage Insurance Premium
The Mortgage Insurance Premium (MIP) is a fee paid by the borrower to the Federal Housing Administration (FHA), an agency of the federal government, to provide certain protections for both the lender and the borrower in a HECM reverse mortgage.
For the HECM Standard, borrowers are
charged an upfront mortgage insurance premium
(MIP) equal to 2 percent of the Maximum Claim Amount, plus an annual premium
thereafter equal to 1.25% percent of the
outstanding balance on the HECM loan.
The HECM Saver, however, was set up
to reduce upfront fees. On the Saver,
the upfront MIP is only .01% of the Maximum Claim Amount. The annual
premium remains at 1.25% of the loan
balance. The Federal Housing Administration
collects the insurance premiums, which
are placed into a mortgage insurance fund.
The insurance fund guarantees borrowers that their funds will always be available to them, no matter what might happen with their lender. The lender is insured against loss if the value of the home at the end of the loan is less than the balance due.
If the company servicing the loan is interrupted, FHA assumes responsibility
for the loan, providing the borrower with
uninterrupted access to proceeds from his
or her reverse mortgage.
In cases where the sale of the home is not
enough to pay back the reverse mortgage, the
insurance protects the borrower or estate
from owing more than the sale price by
covering losses incurred by the lender.
Appraisal Fee
An appraiser is responsible for assigning
a current market value to your home.
Appraisal fees vary by region, type and value of home, but average $450.
This is the one fee generally paid in cash, often before the loan is made, and not with the loan proceeds. In addition
to placing a value on the home,
an appraiser must also make sure there
are no major structural defects, such as
a bad foundation, leaky roof, or termite
damage. Federal regulations mandate
that your home be structurally sound, and
comply with all home safety and local building codes, in
order for the reverse mortgage to be
made. If the appraiser uncovers property
defects, you must hire a contractor to
complete the repairs.
Once the repairs
are completed, the same appraiser is paid
for a second visit to make sure the repairs
have been completed. Appraisers
generally charge $125 dollars for the
follow-up examination.
If the estimated cost of the repairs is less than 15 percent of the Maximum Claim Amount, the cost of the repairs may be paid for with funds from the reverse mortgage loan and completed after the reverse mortgage is made. A "Repair Set-Aside" will be established from the reverse mortgage proceeds to pay for the cost of the repairs. The homeowner will be responsible for getting the repairs completed in a timely manner.
Closing Costs
Other closing costs that are commonly charged
to a reverse mortgage borrower, which are the same for any type of mortgage, include:
- Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally between $20 to $50;
- Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally about $20;
- Escrow, settlement or closing fee. Generally includes a title search and various other required closing services. Cost: can range between $150 to $800 depending on your location;
- Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75 to $150;
- Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: can range between $50 to $500 depending on your location;
- Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50;
- Title insurance.Insurance that protects the lender(lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance;
- Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100;
- Survey. Determines the official boundaries of the property. It’s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower’s property. Cost: Generally under $250
(Note: Cost estimates can change over time. For most current costs, consult a lender. Also, some states may have local fees that are not included here.)
Servicing Fee & Set-Aside
A lender typically earns monthly fees, known as servicing fees, for its administration of the loan. These can be a fixed monthly amount or calculated into the interest rate on the loan. If a fixed monthly amount is to be charged, an amount of funds will be "set-aside" from the loan proceeds, to be used to pay this monthly fee.
The service fee set-aside is deducted from the available loan
proceeds at closing to cover the projected
costs of servicing your account. Federal
regulations allow the loan servicer (which
may or may not be the same company as
the originating lender) to charge a monthly
fee that is no higher than $35. The
amount of money set-aside is largely
determined by the borrower’s age and life
expectancy. Generally, the set-aside can
amount to several thousand dollars.
Many lenders have either eliminated the
servicing set-aside or included it in the interest
rate. (Note: The servicing set aside is just
a calculation and not a charge. The only
amount added to your loan balance is
the monthly servicing fee, which is typically $35 per month or less.)
Interest
With a reverse mortgage, you are charged
interest only on the funds(loan proceeds) that you
receive. For example, if you take your
loan proceeds as a line of credit, you are only
charged interest on the portion of the line
of credit you have withdrawn.
The interest is compounded, which means you pay ongoing interest on the principal, plus accumulated interest.
Reverse
mortgage products are available with both
fixed interest rates and variable interest
rates. The variable rate is tied to an index, such as the 1-Yr. Treasury bill or the
30-Day LIBOR (London Interbank Offered Rate),
plus a margin determined by yield requirements in the financial markets. The margin is set at the time of loan origination and does not change over the life of the loan. During the life of your loan, the loan balance increases by the amount of compounded interest accrued.
Because there are no payments made by the borrower during the life of a reverse mortgage, interest is not paid on a current basis. It does not have to be paid out of your available loan
proceeds either, but instead accrues, at a compounded rate, through
the life of the loan until repayment occurs at the end.
Beginning April 1, 2013, the HECM Standard product option is only available with an adjustable interest rate.
Other Disclosures
Your lender will supply you with a
large package of additional disclosure
documents that are designed to help make
the process as transparent as possible.
One such document is the Total Annual
Loan Cost (TALC) Disclosure, a form
required by the Federal Reserve Board
on all reverse mortgage transactions, that
illustrates the cost of the loan if it is
outstanding for different durations of time.
The Good Faith
Estimate
clearly discloses line-by-line the various
fees that are being charged. Other disclosures, like an amortization table, illustrate the
amount of interest that will accrue, so that you are fully
informed about the costs associated with
getting a reverse mortgage.
The application process formally begins after counseling, once you provide the lender with your loan
application and the signed disclosures
as well as required information, including
verification of a Social Security number,
a copy of the deed to your home, information on any
existing mortgage(s), and a signed counseling
certificate (signed by both the homeowner
and counselor).