This is the 2^nd installment of the series Everything You Need to Know About Reverse Mortgages where I explore the costs associated with a reverse mortgage and present 5 other alternatives.

How much does a reverse mortgage cost?

A reverse mortgage is a special loan that allows homeowners aged 62 and older, to access equity in their homes.  Unlike other loans, reverse mortgages do not require monthly payments by the homeowner.  While this type of loan is extremely popular, it should only be considered after doing thorough research.  Of the home equity loans that are available, reverse mortgages are far more expensive.

A perspective borrower will encounter two types of costs associated with a reverse mortgage.  There are upfront costs to get the loan funded as well as ongoing costs incurred while the loan is outstanding. 

Upfront costs 

Here are examples of common upfront costs for reverse mortgages that you may encounter.

The Federal Housing Administration (FHA) requires counseling before a senior citizen gets a Home Equity Conversion Mortgage (HECM). Counselors must be FHA approved and often work for non-profit organizations.  Counseling fees start at $125 but can be waived depending on the financial circumstances of the borrower.

Lenders charge origination fees to issue the loan. “Application fees”, “underwriting fees”, “appraisal review fees” and “document preparation fees” are all common examples of the extra costs.  Origination fees for HECM loans are capped at $6,000.

These are extra costs paid to third parties for the appraisal, title search, survey, home inspection, recording fees, mortgage taxes, credit checks and other fees.

For HECM’s insured by the FHA, there are upfront and annual insurance premiums charged to ensure that you will receive your loan advances.  FHA upfront mortgage insurance is 2% of the home’s appraised value.  It is incurred in addition to homeowner’s insurance.

If the homeowner has an existing mortgage, defaulted student loans, federal income taxes or real estate taxes in collections, these debts must be paid when the reverse mortgage is closed. 

These upfront costs should be paid out-of-pocket if you have enough available cash.  They can also be financed with loan proceeds if necessary.  Keep in mind that the amount available to you will be reduced if you choose to finance your upfront costs.

Ongoing Costs

Ongoing costs for a reverse mortgage are added to your loan balance each month.  As a result, you are charged interest and fees on top of the prior month’s interest and fees.  Ongoing costs will include:

This is the amount charged by the lender for the loan.  It is based on the outstanding mortgage balance.  

The costs you pay to the lender to administer the loan such as preparing loan statements and distributing loan proceeds.

This cost is 0.5% of the outstanding mortgage balance on FHA insured HECM’s. Since the balance on the reverse mortgage grows over time, the amount of the mortgage insurance premium gets more expensive as well.

In cases where the borrower can’t afford to pay homeowner’s insurance, flood insurance or property taxes on the home, the lender will pay these expenses from the loan proceeds. Interest will be charged on these costs as well.

Before you obtain a reverse mortgage, consider these 5 cheaper alternatives first:

1.  wait!!

Even though a homeowner is eligible for a reverse mortgage at age 62, that may be too young when you consider that people are living much longer than they used to and often work well beyond the age of retirement.  In fact, it’s not uncommon to find people living well into their nineties.   Unfortunately, an extra 30 years of life with a reverse mortgage will result in excessive interest and fees.  

2.  Home Equity Loan or Home Equity Line of Credit

A less costly alternative is to withdraw equity with a traditional home equity loan or line of credit.   These instruments do not pay off your original mortgage but become a second lien on your home.  Loan origination fees are still charged but they are not as costly as upfront costs associated with reverse mortgages.  Unfortunately, you will have to qualify for the loan and have sufficient income to make monthly payments.

3.  Cash-Out Refinance

Another option is to withdraw equity and get a new mortgage.  A refinance makes sense if you can get a lower interest rate and you intend to stay in the home for several more years.  Loan origination fees will be charged for a new mortgage, but they are less than upfront costs with a reverse mortgage.  A refinanced mortgage will also need to be paid back so the borrower must be able to qualify for financing.

4.  Downsize Your Home

A great option is to sell the house and get a more budget friendly home.  When done right, having a smaller home will relieve you of the burden of homeownership so you can fully enjoy your golden years.  You will have the cash from your home equity to spend, invest or save as you see fit.

5.  Lower Your Expenses

If the idea of selling your home doesn’t thrill you, try to cut back on your expenses or possibly rent a room for extra income.

Things to Remember…

Everything you need to know about reverse mortgages and their associated costs should be carefully considered by homeowners.  For some people, homeownership can be a wonderful blessing.  For others, it can be a real pain.  In all cases, homeownership is challenging and expensive.  However, when the responsibilities and the cost become too much, homeowners have choices.  Whichever option you choose, make your decision based on the best available information.  Also take your own needs into account.  Most importantly, enjoy your hard-earned dollars rather than give it back to the bank.  This is your time.