Reverse Mortgage Loans are unlike traditional loans or forward mortgages in many ways. Even the costs are figured differently. Because a Reverse Mortgage is often paid to the borrower in monthly payments or in the form of a line of credit that the borrower can access as they choose.
The origination fee on the HUD Home Equity Conversion Mortgage (HECM or Heck-um) is calculated based from the lower of the principal lending limit for the area or the property appraised value. But to really understand Reverse Mortgage charges, I would like to go in the order of a Reverse Mortgage Calculator Results page to explain the various charges you will find.
Seniors may purchase home with reverse mortgage You will also find some other very important information at the top of the results page such as the Margin if you have an adjustable rate loan, your initial interest rate of the loan and the expected rate of the loan (the expected rate is one of the determining factors of how much money you will qualify for so it is locked for 120 days at time of application on the HECM adjustable rate mortgage while the initial rate always floats and merely tells you what the rate will be on your loan when it closes) and the life cap which is the maximum interest rate that can ever be charged on the loan if rates increase.
Thou come to a fee that is labeled Monthly Service Fee. The fee can sometimes vary by loan type and lender. And when we get down to the bottom of this form, we'll see what appears to be a charge that is called a Servicing Fee Set Aside.
We will discuss this more in depth later because it is not an actual charge and is very often misconstrued as another expense when borrowers are looking at their charges. The Maximum Claim Amount/Adjusted Property Value is the lower of your property's appraised value or the maximum lending limit for the area in which your property is located if you are applying for a HUD HECM. The borrower's age, the interest rate, the amount of the servicing fee and the value/maximum claim amount all go into the calculation to determine the next number which is the Principal Limits, or the amount for which you qualify under the reverse mortgage program.
From the Principal Limits, you take away the costs and any set asides to determine how much money you will actually receive. The first cost listed on the HECM reverse mortgage is the Upfront MIP which is the Mortgage Insurance Premium which is paid to HUD.
This fee is never negotiable, but if you are refinancing one FHA reverse mortgage into another FHA reverse mortgage, any Mortgage Insurance Premium you have already paid is credited to the new loan and does not have to be paid a second time. The origination fee is the fee that is paid to the lender or the broker who processes and packages your loan. This fee is currently capped at 2% of the Principal Lending Limit, but is not set in stone at this figure.
The figure that is labeled Other Closing Costs includes all your title fees, escrow charges, appraisal, notary, credit report, flood insurance and all the third party costs that go into doing a home loan. All of the charges will be itemized on a separate disclosure called the Good Faith Estimate. It is important to note here however that HUD regulates the charges that can be charged to reverse mortgage borrowers and typical extras like administration fees, processing fees, etc. will never be found on HECM reverse mortgages as they are not allowed.
Proprietary or Jumbo reverse mortgages may allow some additional fees, but not excessive fees. Aside from the Origination Fee which goes to the lender or broker, all of the other charges go to third party providers and the amount being charged can only be the actual provider's charge, the lender or broker cannot pad the amount and make a little money on it also.
If you are taking an initial advance, that will be shown in the next box. Total property lien amount will indicate any liens on the property that will be paid off with your reverse mortgage proceeds. Non-real estate debts will indicate the total amount of any other debts you have indicated that you want paid with your reverse mortgage. The next line that always seems to confuse everyone and that we touched on briefly before is the Servicing Fee Set Aside.
The servicing fee set aside is an amount that is taken from the amount left to the borrower and set aside and not made available to pay for servicing fees as they come due. This amount is not a direct correlation of the monthly servicing fee multiplied by a given number of months but rather a mathematical equation that takes into consideration future values, etc. But how they figure it is not as important as knowing what it is. It is not a fee. The servicing fee becomes due and payable every month and that is added to your loan balance monthly.
It would be just as easy if HUD never put a set aside amount on the paperwork and just reduced your Principal Limits by the amount they put in this box and called it a day as the end result would be the same but they don't. Just don't add this into your fees when you're looking at the up-front costs.
So the bottom line is that as we've always said, a reverse mortgage is not for everyone and the costs can be high if you do not think you will have the loan very long. However, it really pays to look at the Loan Information Page as well as the Good Faith Estimate and go over each charge with your reverse mortgage specialist and your family member(s) or trusted financial advisor to be certain that you understand them before you close your loan.
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