Closing Costs
Fees, Insurance and Interest Rates
HECM Saver: Lower up-front Costs
October 4, 2010 With the newly introduced HECM Saver, the
up-front mortgage insurance premium required by the Federal Housing
Administration (FHA) is significantly reduced as compared to a HECM
Standard. As a result, you could save thousands of dollars,
depending on your home's value. While the maximum amount of money
you can borrow is less than with a HECM Standard, lower costs may
make it an attractive option.
The HECM Saver option requires an
upfront FHA Mortgage Insurance Premium of only .01% of
the home’s value, as compared
to the 2% requirement for the
standard FHA reverse mortgage loan.
HECM Standard Reverse
Mortgage
Under the HECM Standard option, the
upfront mortgage insurance premium will
remain at 2% of the value of the
property, or 2% of the maximum FHA loan
limit of $625,500, if the property has a
value greater than that.
FHA
Mortgage Insurance
The FHA
insurance provides three guarantees:
- The homeowner cannot "outlive" the
Reverse Mortgage
- The homeowner and heirs will not be
liable if the balance of the loan exceeds the value of the
home.
- The FHA will take over the loan if the
lender defaults.
Origination Fee
The origination fee is what the Reverse
Mortgage lender earns on the loan. The FHA uses a formula to
determine what the lender can charge. The formula is:
- 2% of the first $200,000 of property
value and 1% of the second $200,000 of property value
- An absolute maximum of $6,000
- A floor of $2,500
Title Fees
Title guarantees the homeowner's legal
ownership of the property and is required for all mortgages
whether reverse or conventional. The largest part of title fees
is title insurance. Title fees are usually broken down into:
- Title insurance (varies by state and
with property value)
- Title settlement
- Title search/exam
- Recording
- Delivery/courier
- Payoff (if a mortgage is being paid
off)
- Notary
- Doc prep
Appraisal
The appraisal establishes the legal value
of the home. A Reverse Mortgage appraisal must be
conducted by an FHA-approved appraiser and follows specific FHA
guidelines that require more documentation than a typical
appraisal. A typical FHA appraisal costs $350-$550 depending on
the state.
Other Closing Costs
- Counseling
- Wire Fee
- Flood Certification
- Credit Report
Interest
A Reverse Mortgage accrues interest just
like a traditional mortgage except that the homeowner is not
making payments each month to reduce the loan balance. As a
result the loan balance grows until the homeowner permanently
moves out of the property or passes away.
About two-thirds of Reverse Mortgage
holders have adjustable rate reverse mortgages because the rate
is usually lower than a fixed rate. Because the homeowners do
not make monthly payments, homeowners are not usually as
concerned about possible future change in the interest rate.
Interest Rates and FHA Mortgage Insurance
The interest rate on a Reverse Mortgage
has fluctuated between 3% and 5%. The real interest rate is one
half of a percentage point above the quoted rate because the
total rate includes the FHA's ongoing mortgage insurance
premium. For example, if the quoted rate is 4.1%, the rate with
insurance is 4.6%.