Various Costs for Reverse Mortgages Insured by FHA
Lots of seniors keep a distance from reverse mortgage because of the high costs. My article will focus on various costs and fees when you plan to take out a reverse mortgage. HECM program consists of two types – HECM Standard and HECM Saver. The costs and fees may be different as per different programs.
Mortgage insurance premiums
As its name suggests, FHA reverse mortgage is the type of mortgage that is insured by FHA. In exchange for the protection from FHA, the borrowers will be charged mortgage insurance premiums. So the premiums will be paid to FHA other than your lender. To explain the term further, there are two mortgage insurance premiums, one of which is upfront mortgage insurance premium and the other is called annual mortgage insurance premium.
You should always pay for FHA mortgage insurance premiums no matter which HECM program you opt for. Yet, the mortgage insurance premiums are charged differently for different programs.
• Upfront mortgage insurance premium
Upfront mortgage insurance premium should be paid as soon as your reverse mortgage is closed. In general case, if you choose HECM Standard product, the FHA mortgage insurance premium will be 2% of the house price or the lending limit in your state, whichever is less. So if the house value of your house is $300,000, the upfront mortgage insurance premium will be $60,000. On the other hand, suppose you decide to select HECM Saver product, the FHA mortgage insurance premium will be 0.01% of the house price or the lending limit in your state, whichever is less. With the same house price, the upfront cost will be $30. What a sharp contrast!
• Annual mortgage insurance premium
This kind of premium is collected annually, which is charged 1.25% of your loan balance at present. For example, you are eligible for an $180,000 reverse mortgage at the beginning, so the annual mortgage insurance premium will be $2,250. Several years later, you have used up $50,000, and the loan balance reduces to $130,000, thus the annual mortgage insurance premium will be $1,625. Your loan balance decreases over time, so does the annual mortgage insurance premium.
What is origination fee?
Origination fee, a common charge for the majority of mortgages, covers the running expenses of a reverse mortgage. Unlike mortgage insurance premiums, origination fee is paid directly to your lender.
The origination fee is also determined by your house value. Providing that your house price is below $125,000, the maximum origination fee you will be charged is $2,500. Suppose your house value exceeds $125,000, the origination fee for you will be calculated with this formula:
2% * the first $200,000 of your house value + 1% * the excess amount
So assume that the house value of your house is $300,000, you will be charged origination fee of $5,000 (2% * $200,000 + 1% * $100,000). And you should know that there is an upper limit for origination fee – $6,000. When your house value reaches $500,000, your origination fee will be $7,000 (2% * $200,000 + 1% * $300,000) if you use the formula above. Yet in compliance with the cap, your origination fee will not exceed $6,000.
Should I purchase title insurance?
Yes, you are required to purchase title insurance when you plan to take out a reverse mortgage. As a matter of fact, title insurance is not exclusive for reverse mortgages, but applies to all types of mortgages. Title insurance is designed to protect your legal ownership of your property from relevant troubles. Keep in mind that you pay for the title insurance upfront, but it is the lender who takes advantage of the benefits.
Title insurance falls into two types – owner’s policy and lender’s policy.
The lender’s policy, which is issued only to lenders, can cover up to the amount of your reverse mortgage. Unlike other policies like life insurance, title insurance protects your lender from claims that occur before your policy is issued, and when your policy begins, your coverage comes to an end. While the owner’s policy is meant to guarantee the buyer that the property is free from all defects, liens and encumbrances.
How about real estate appraisal fee?
To confirm the actual house value of your home, the FHA-approved appraiser will carry out a reverse mortgage appraisal in accordance with the relevant regulations. Typically, you are required to provide more materials than other appraisal conduction. When it comes to the cost, it is between $300 and $500.
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