In our previous article, “My Reverse Mortgage Costs How Much,” we explored all the upfront fees involved in a reverse mortgage. Now, of equal importance, we explore continual costs that are accrued during the life of a reverse mortgage. These costs include the interest rate, the ongoing HUD Mortgage Insurance Premium (MIP), and the monthly service fee.
The single item that may cost the most over the life of the loan is the interest rate. With a reverse mortgage the borrower has the option to obtain a fixed rate reverse mortgage or an adjustable rate reverse mortgage. Since the rate is known on the fixed rate, it provides the security of knowing exactly what the loan balance accrual will be at any point in time. The adjustable rate is based on one of two indices: LIBOR (London Inter-Bank Offered Rate) or CMT (Constant Maturity Treasury) plus a margin that currently ranges from 2.75% to 3.75%. It is important to remember that the interest on a reverse mortgage accrues as a compound rate, meaning that borrowers will be accruing interest on interest. It is very important to look at an Amortization Schedule to help understand how the loan balance will grow over time.
Next, every reverse mortgage, whether fixed or adjustable will have an additional 50 basis points (0.5%) for mortgage insurance that will continue to accrue for the life of the loan on whatever the outstanding balance is. As mentioned in my previous article, “My Reverse Mortgage Costs How Much,” the upfront and continual mortgage insurance is in integral part to help maintain the stability and financial soundness of the HECM reverse mortgage program.
Lastly, under the FHA HECM program, borrowers are charged a monthly servicing fee that ranges from $25-$35 to manage their account once the loan closes. This fee is added to the loan balance each month that the loan is outstanding. When determining the amount of benefit available to the borrower, there is the service fee set-aside to consider. The service fee set-aside is an estimate of what the total servicing fees will be over the life of the loan. Although it’s not considered a closing cost, the service fee set-aside can equal several thousand dollars, which is deducted from the available loan proceeds. You do not have access to that money, nor does it earn interest.
To summarize, in addition to the upfront fees involved in a reverse mortgage, there are continual costs that are accrued during the life of the reverse mortgage. When making a decision on whether or not to obtain a reverse mortgage, it is important to explore and understand all fees involved. A reverse mortgage advisor should be able to explain all fees to you in a manner that makes them easy to understand. As always, reviewing the Good Faith Estimate (GFE), Loan Comparison, TALC (Total Annual Loan Costs) and Amortization Schedule with a family member or trusted advisor is recommended.