The Double Edged Sword of Reverse Mortgage Closing Costs
I wish there were such a thing as a perfect mortgage product. People always ask me, "what is the down side to getting a reverse mortgage? It looks too good to be true".
The truth is HUD backed insured mortgages have higher closing costs than forward mortgages. I always make a point of telling this to my customers as soon as I can.
FHA insured mortgage upfront costs are high for 3 reasons: First, the lender performs an appraisal on the home and charges costs on the value of that appraisal, not the money the borrower is qualified to receive.
The second is FHA charges 2% of the value of the home up to $417,000. And the last is reverse mortgage lenders charge an origination fee .5% to 1% higher than typical forward mortgages.
One doesn't need to have a degree in advanced calculus to quickly figure out that closing costs are fairly expensive.
As far as the origination fee goes, one could make the case that it is not more expensive than a forward mortgage. The difference is forward mortgages build the fee into the rate.
Much of these costs are FHA. In the example above we're talking $8340 just for mortgage insurance. On the surface this seems a bit out of hand, but you must remember, this is the mechanism that allows these same "unhappy with the closing costs" seniors the right to borrow as much as they do.
To put this into perspective, a seventy year old customer with a two hundred thousand dollar home would be entitled to borrow roughly $130,000 with an FHA insured mortgage.
There was once a number of outlets for non-FHA insured reverse mortgages. They exist only as ultra niche scenarios now. The reason is they simply couldn't compete with the FHA reverse. In our example a reverse mortgage customer, using a private product, would receive $100,000 at best.
Why ? Because the FHA insurance, everyone is so unhappy about, allows lenders to feel comfortable enough to lend such large amounts.
The insurance covers the lender in the event that one day more is owed on the home than the home is worth. This is the lender's biggest fear.
Expensive, horrible, bitter FHA insurance hedges the lender's risk, which makes much more money available to borrowers. But in the end it allows so many seniors to solve stressful financial issues.
The truth is HUD backed insured mortgages have higher closing costs than forward mortgages. I always make a point of telling this to my customers as soon as I can.
FHA insured mortgage upfront costs are high for 3 reasons: First, the lender performs an appraisal on the home and charges costs on the value of that appraisal, not the money the borrower is qualified to receive.
The second is FHA charges 2% of the value of the home up to $417,000. And the last is reverse mortgage lenders charge an origination fee .5% to 1% higher than typical forward mortgages.
One doesn't need to have a degree in advanced calculus to quickly figure out that closing costs are fairly expensive.
As far as the origination fee goes, one could make the case that it is not more expensive than a forward mortgage. The difference is forward mortgages build the fee into the rate.
Much of these costs are FHA. In the example above we're talking $8340 just for mortgage insurance. On the surface this seems a bit out of hand, but you must remember, this is the mechanism that allows these same "unhappy with the closing costs" seniors the right to borrow as much as they do.
To put this into perspective, a seventy year old customer with a two hundred thousand dollar home would be entitled to borrow roughly $130,000 with an FHA insured mortgage.
There was once a number of outlets for non-FHA insured reverse mortgages. They exist only as ultra niche scenarios now. The reason is they simply couldn't compete with the FHA reverse. In our example a reverse mortgage customer, using a private product, would receive $100,000 at best.
Why ? Because the FHA insurance, everyone is so unhappy about, allows lenders to feel comfortable enough to lend such large amounts.
The insurance covers the lender in the event that one day more is owed on the home than the home is worth. This is the lender's biggest fear.
Expensive, horrible, bitter FHA insurance hedges the lender's risk, which makes much more money available to borrowers. But in the end it allows so many seniors to solve stressful financial issues.
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posted by Debt Consolidation Loan at
11:03 PM
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