Loan Specifications: Reverse Mortgage Loan Costs

As with all mortgage loans, there are costs. However, because the lender makes payments to you on a reverse mortgage rather than you making payments to the lender, the cost structure is different. In fact, these costs, several of which are deducted from your gross benefit at loan closing, may seem very high to you. One of the disclosures you will receive as part of the reverse mortgage process is a total annual loan cost disclosure required under the Federal Truth in Lending Act. That disclosure points out that the effective cost of any reverse mortgage loan depends on how long you keep the loan and how much your house appreciates in value.

When your costs are calculated on an annual basis over the term of the loan, rather than as an up-front lump basis, it becomes clear that the longer you keep a reverse mortgage, the lower the costs relative to your benefits are. It is important to keep this in mind when you review the loan costs.

There are typically three categories of costs that will affect your benefits: the interest rate on the loan; origination, mortgagee insurance and other closing costs; and lender servicing costs. These are described more fully below.

Interest Rate

Lenders charge interest on the loans they make. The reverse mortgage is no different. However, how you pay that interest is different. You don’t make monthly interest payments during the life of the loan. Instead, the interest you owe for each month is added to the principal balance each month, accumulating during the loan term. It is then all paid at once at maturity as part of paying off the loan.

Every reverse mortgage product we offer is an adjustable rate mortgage. Depending on your choice of product, the interest rate will adjust monthly, semi-annually or annually with changes in an index based on U.S. Treasury Bills or LIBOR (London Inter Bank Offered Rate). These indexes are published by the Federal Reserve Board and/or in the Wall Street Journal.

Loan Origination and Mortgagee Insurance Costs

As indicated, a lender incurs costs in originating a reverse mortgage, just as it does when making a standard mortgage loan. The costs of a reverse mortgage vary by product and can be financed through the loan. For our programs, the appraisal fee is the only expense you are required to pay in cash (or by check or credit card). Other lender origination costs, as well as more information about the appraisal fee, are highlighted below. Your Reverse Mortgage Specialist will provide you with a customized benefit calculation sheet showing the different products and costs for your specific situation.

Origination Fee

This fee covers a lender’s operating costs for originating a reverse mortgage. This fee can vary substantially by lender and product but will not exceed 2% of the value of your home and may be much less.

Mortgagee Insurance Fee

The mortgagee insurance fee is based on the loan amount and varies by the type of program. It is set aside by the lender or used to buy insurance from the FHA or a private insurance company to assure that your payments will continue if the loan servicer goes out of business and/or that you will never owe more than the appraised value of your home at loan maturity.

Appraisal Fee

This may vary by area and is the cost of having an appraiser assign a current market value to your home and identify any safety or structural defects, such as foundation, roof, or termite damage. To be eligible for a reverse mortgage, the home must be structurally sound and comply with all home safety codes.

If the appraiser identifies property defects, you will need to hire a contractor to make the necessary repairs. Once the repairs are complete, the same appraiser is paid to re-inspect the property to confirm that the repairs have been completed. Depending on the program and extent of repairs needed, you may have the option of completing the repairs after closing or using loan proceeds to pay for the repairs.

Title Insurance

The purpose of title insurance is to protect against potential loss resulting from disputes over property ownership. These disputes may involve claims made by creditors, heirs, previous owners or other parties. The lender will require a title insurance policy to protect its lien interest. The cost of the lender’s policy varies depending on the loan amount. It is important for you to know that the lender’s title policy does not provide this protection to you.

If you also want a title insurance policy, you will need to purchase one that is separate from the lender’s. For more information about title insurance, your Reverse Mortgage Specialist can give you more information about title companies in your area.

Other Closing Costs

Other costs that are commonly charged for a reverse mortgage include a credit report fee, a flood certification fee, an escrow, settlement or closing fee, a tax service fee, a document preparation fee, recording fees, fees or taxes that may be charged by state or local governments in connection with mortgages, courier fees, pest inspection, and/or survey fee. These are usually paid to third party companies other than the lender. Some lenders will offer bundled fee packages they have negotiated with these third party companies to help reduce the total cost of closing. You will receive an estimate of these closing costs shortly after you apply.

Servicing Fee Set-Aside

Almost all reverse mortgage programs have a servicing fee set-aside. The amount set aside from your proceeds at closing is based on an estimate of the monthly servicing costs (which may range from $30 to $35 per month) over the term of the loan and is deducted from your gross benefit. In other words, it reduces the amount of the loan made available to you. Some reverse mortgage programs do not set aside for the monthly servicing fee at closing. Whether or not there is a set-aside, during the time you have the loan, the monthly fee amount is added to the outstanding principal balance each month. This way, you don’t pay interest on the fee until it is added to your loan balance.

Once you have assessed your financial needs and determined that a reverse mortgage is right for you, or if you simply want to learn more, contact a Reverse Mortgage Solutions Advisor at 1-800-959-3789.

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To speak with a Countrywide Reverse Mortgage Solutions Advisor, call 1-800-959-3789.

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