Payment and Costs
How much money you can get from a reverse mortgage depends on how old the youngest person on the title is (the older you are, the more you can get), the amount of equity in your house (the more equity in the house, the more you can get), the interest rate you are charged on the reverse mortgage (the higher the interest rate, the less you can get), and your location.
Remember, if you already have an existing traditional mortgage you need to pay it off with the reverse mortgage, so this will reduce the amount of money you can actually receive. Depending on the amount that you can get from the reverse mortgage and the amount you have left on your regular mortgage, it is possible that you will only get enough money to pay off the existing mortgage. In this situation you will no longer have a mortgage payment, but you will not directly get any money. However, not having any mortgage payment by itself can be a great benefit, if you are struggling to pay all of your expenses now.
There are five different payment options for reverse mortgages (although some loan products may not offer all of them):
- Line of credit. You can take the whole amount at once, or whatever amount you want whenever you want until you have withdrawn the whole credit amount available. With a HECM the amount that is available to you grows over time, based on the interest rate that you are charged on the loan.
- Term. You receive set payments each month for a specific number of years. The longer the term is, the less you will receive each month.
- Tenure. You receive set payments each month for as long as you live in the home. You receive less from this than from a term plan.
- Modified term. You receive a set payment each month for the term you choose and have a line of credit as well. The higher the line of credit is, the less you will receive in set payments.
- Modified tenure. You receive a set payment each month for as long as you live in the home and have a line of credit as well. The higher the line of credit is, the less you will receive in set payments.
Once you choose your plan and get your reverse mortgage you can switch to another plan for a $20 fee.
Costs of a reverse mortgage
Because a reverse mortgage is a loan you will be charged closing costs, interest on the money borrowed, and a servicing fee. For closing costs you generally need to pay an origination fee to the lender for processing the loan and fees to third parties for such services as an appraisal, title search, survey, inspection, and recording the transaction. Once the loan is closed the lender or servicer of the loan generally will charge a servicing fee, which cannot exceed $30 or $35 a month for HECM loans depending on if the interest adjusts yearly or monthly. You also have to pay a mortgage insurance premium. This insurance is collected to ensure that all borrowers will receive the funds promised to them, regardless of how long they live, and to compensate lenders for their losses if, when the loans are repaid, they receive less than what was loaned. Most of the costs can be financed with the reverse mortgage so you don’t have to pay for them out of pocket.
The costs of a standard HECM are typically quite high, more than for a traditional mortgage. However, there is an alternate type of HECM available, the HECM Saver, that charges a lower mortgage insurance premium. The amount that can be borrowed under a HECM Saver is less than under a standard HECM, but it can be a good cost-saving option for those who are not looking to take out a significant amount of equity.
While fixed-rate programs are available, most HECM lenders charge a variable interest rate. The interest rate is determined based on the current U.S. Treasury Security Rate or London Interbank Offered Rate (LIBOR) plus a specific margin. You can choose an interest rate that adjusts once a month or once a year. The interest rate with a monthly adjustment is usually lower than for a yearly adjustment, but the cap (the amount the interest rate can change) is higher. With a monthly adjustment the cap is a ten percentage point increase over the life of the loan. With a yearly adjustment the cap is two percentage points per year and five points total over the life of the loan. A lender must disclose to you the total annual loan cost (TALC). Because your balance grows over time due to not making payments, the interest you are charged grows as well. This is opposite from what happens in a traditional mortgage, where the interest charged decreases over time because the loan balance declines.