Common Myths – 4
Common Myths, Fees & Costs August 24th, 2009In previous post we discussed myths 1-3. Here now is the discussion regarding Reverse Mortgage fees.
4 - The fees are outrageous. Yes, the fees you pay for a Reverse Mortgage are substantial… but “outrageous” ? That’s a little over the top and usually the comment of misinformed persons or even media writers who do not have any concept of what the fees and charges relate to. So let’s examine them and see who gets what:
My borrower is a long since retired single person living in a beautiful coastal Maine community with numerous friends. His sole source of income is a portfolio of stocks & bonds devastated by major losses now yielding only about $1,200 per month. He could sell the home for $325,000 for which the fee would be $19,500 in real estate commission. (Now, that’s outrageous!) Or he could sell some of the equities in a depressed market at a 50% loss. Or he could do a reverse mortgage and generate a lifetime income increase of $1,942 per month for a combined total monthly income of $3,142. Total up front fees and costs would be about $13,657… usually financed or rolled into the loan balance. With this latter choice he continues to own the home, he lives rent free, he continues to own his stocks & bonds which have a chance to make a comeback at some point.
Origination Fee – We charged the borrower $4,900 to educate & answer his questions, to help him select the program making the most sense in his situation, to prepare the proper paperwork, travel to his home to take his application, prepare the required property insurance, flood, credit, title documentation, to process the documentation and properly submit his file to the lender, respond to underwriting demands of the lender, oversee the commitment procedure, prepare closing documentation and hold the closing in his home with the lender’s attorney present. We discounted our origination fee by $350 in this case. We could have charged as much as $5,250 according to HUD rules.
FHA Mortgage Insurance – HUD requires the borrower to pay an upfront fee of 2% or $6,500 in this case for FHA Mortgage Insurance. This fee is federally mandated and may not be discounted. In this example you can see that almost, 50% of the total $13,657 fees & costs are derived from the FHA Mortgage Insurance fee paid direct to the government, not the lender.
3rd Party Closing Costs – These charges total $2,057 and include normal real estate related expenses charged by third parties to the transaction. Our borrower paid $425 for the FHA appraisal, $53.75 in credit report, flood certification and courier costs. $125 counseling fee, $200 title search, $550 attorney fee, $694 title insurance fee, $60 recording fee and $100 lender document prep fee.
Conclusion – None of these fees and costs are outrageous. An origination fee (or broker fee or bank fee) is paid by every customer for every mortgage loan… but with conventional mortgages it’s usually buried somewhere in the interest rate so most borrowers don’t even know it. FHA Mortgage Insurance is required on about 25% of all conventional loans today and it protects the borrower as well as the lender in the case of HECM loans. Uniquely, HECMs are non-recourse loans; conventional loans are not. Borrowers can never owe more than the home value. They have no liability personally. There is no prepayment penalty.
Finally, lawyers, appraisers and title insurance, filing fees, etc. are simply a fact of life when dealing with a real estate transaction. We do not charge any “junk fees” to our borrowers but pick the wrong loan officer/lender and you might get hit with additional fees (application fee, courier fees, etc.)
So…. yes, there are some substantial expenses involved in a reverse mortgage but nobody is stealing anything from seniors. All costs are clearly documented and fully discussed at application including an analysis of the TALC (Total Annual Loan Cost) and the Amortization Schedule. If your loan officer fails to discuss these particular documents at length with you… you picked the wrong loan officer to work with!
Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant
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