The Expense of a Reverse Mortgage

A reverse mortgage is a loan that leverages the equity in a home to generate cash (immediate, over time, or when needed) for the borrower.  For those over 62 years of age, this can be part of a financial strategy during retirement.  Just like any loan, a reverse mortgage has closing costs, and it’s important to know about them if you’re considering a reverse mortgage.

As I’ve written about in previous blog posts, a reverse mortgage may be a good idea if the borrower is 62 or older, has significant equity in their home (or owns it outright), lives in the home as a primary residence, and doesn’t plan on moving.  If approved, the borrower would receive payments from the bank using one of three options:

1. Lump sum
2. Fixed payments
3. A line of credit

Technically, borrowers can also choose a combination of those options as well, such as a partial lump sum of the loan value and the rest as a line of credit.  Another interesting note about the line of credit is that this amount can grow over time since it earns interest.  

While this may seem like a great option for those in this situation, the biggest drawback for pulling the trigger on a reverse mortgage can often be the closing costs.  I want to review exactly what those mean in case you are in that category.  Knowing a bit more about what to expect can help you make an informed decision about a reverse mortgage.

A reverse mortgage is a non-recourse loan, and this means that the loan amount can never exceed the value of the house when the loan becomes due and payable.  Because of this, reverse mortgages have a mortgage insurance payment of 2% of the maximum claim amount, which is usually the value of the home.  So if you have a home valued at $500,000, the mortgage insurance of 2% is $500,000 x 0.02 = $10,000.  

Reverse mortgages also have an origination fee that can range from $2,500 to $6,000.  I know that “origination fees” may be a nebulous term to some, but this fees covers things like underwriting, loan processing, and document preparation.  

Finally, reverse mortgages will have third party closing costs for things like attorney’s fees, notary fees, tax certification, inspections, and appraisals.  Third party closing costs can range from $2,000 to $4,000.  

There are a couple of things that are important to consider about the fees with a reverse mortgage.  The origination fees and closing costs often vary and can be negotiable, so it’s important to shop around.  Also, the closing costs for a reverse mortgage can be added to the loan amount, so these don’t need to be paid in cash by the borrower.  

While these numbers can seem like a lot of money, and this isn’t meant to minimize the amount, another option for those with equity in their home during retirement is to downsize.  This would mean selling a home to purchase another home.  While this may result in a net gain, it doesn’t come without costs.  There are closing costs to consider when buying and selling a home, a down payment, mortgage insurance if the down payment is below 20%, plus the cost of commission if using a realtor (most use a realtor, so let’s presume this is a cost to include).  Commission to a realtor on a $500,000 house (paid by the seller) could be 6%, with 3% going to the buyer’s realtor and 3% going to the seller’s realtor.  This would mean that $500,000 x 0.06 = $30,000 to be paid by the seller (most commonly).

Even the other retirement tools that many use, like a 401(k), are not free of fees.  According to Investopedia, the average fees on a 401(k) can range from below 0.5% to above 2.0% depending on the size of the employer’s plan.  The main reason for bringing this up is that 401(k)s are a very common way to save for retirement, but the fees are often either overlooked or considered part of the equation when using this method.  

Ultimately, it’s about cost and benefit for whatever financial tools you use.  If you’re considering a reverse mortgage to help supplement your retirement income, talking to an expert might be the next best step.  They can help give you all of the details - including firm costs - for your specific situation.  I’d contact the team at Equity Access Group if you’d like to learn more.