Costs of Reverse Mortgages
Although many of the costs of a reverse mortgage are similar to those charged on a traditional mortgage loan, some are unique. Here are the types of fees you typically see on a reverse mortgage:
- Interest: As with a traditional mortgage, the interest rate on a reverse mortgage can either be fixed or adjustable. Fixed-rate loans offer peace of mind because you know up-front what your loan's interest rate will be. However, you typically end up paying more interest over the life of the loan for the security of a stable interest rate.
- With adjustable-rate reverse mortgages, your loan's future interest rate is determined by the overall level of market interest rates. If you get an adjustable-rate mortgage and rates significantly increase, your outstanding loan balance increases faster, thus leaving less equity for the day when your home is finally sold. Odds are better, though, that an adjustable-rate loan will save you on interest costs over the long run, because interest rates rarely skyrocket and remain elevated. Because you are taking on additional risks with an adjustable loan, you will probably owe less total interest on your reverse mortgage, with more equity remaining for you and your heirs after your house is sold.
- Fixed -- rate reverse mortgages make the most sense for seniors who anticipate using their loans over a number of years -- preferably seven or more. Fixed -- rate loans also help you sleep better at night if you're the type who frets over fluctuating interest rates.
- Up-front fees: Most reverse mortgage lenders charge you fees for processing your application, fees for pulling a copy of your credit report, and other fees for originating your loan.
- Closing costs: Your reverse mortgage lender will want to have your home appraised in order to determine its worth. This appraisal helps determine how much you can borrow on your home. The more your home is worth, the more money a reverse mortgage lender lets you tap from your home's equity. Other common closing costs include title insurance, local recording fees, and inspections.
- Insurance costs: When a reverse mortgage lender commits to giving you a reverse mortgage, the institution is taking a risk. If you live much longer than the lender expects, and your home's future value falls far short of the expected worth, the reverse mortgage lender can actually lose money if the amount of your outstanding loan balance exceeds the value of your home. To reduce the risk, mortgage lenders buy insurance. And guess what? You get to pay for the insurance, either as a yearly fee (sometimes called a risk pooling fee) or as a percentage of your home's value when you take out your reverse mortgage.
- A portion of your home's value or future appreciation: Some reverse mortgages include an additional cost. On some loans, this cost is based on a portion of the appreciation in your home's value from when your reverse mortgage began. On other loans, this added cost is a portion of the value of your home when your reverse mortgage is ultimately paid off from the sale of your home.