Questions Borrowers Should Ask Before Getting a Reverse Mortgage
Edited by Harry Jensen
What size reverse mortgage you qualify for depends on several factors- Your Age: the older you are, the larger the reverse mortgage you qualify for. If there are two people on a property title, lenders use the age of the youngest person to determine what size reverse mortgage you can obtain
- Interest rate: the lower the interest rate the larger the reverse mortgage you qualify for
- Value of the property: the higher the value of the property you are getting a reverse mortgage on, the larger the reverse mortgage you qualify for
- FHA mortgage limit: there are limits to the size of reverse mortgage you can obtain. Your mortgage amount cannot exceed the FHA mortgage limit for your county
- The maximum reverse mortgage amount is typically $625,000
Unlike a traditional mortgage, there is no pre-determined length for a reverse mortgageWith a reverse mortgage, the loan lasts as long as you live in the property or until you decide to pay back the loan (which you are not required to do as long as you live in the property)- A reverse mortgage could last five years or it could last 32 years -- there is no set term
It is important to highlight that the the longer a reverse mortgage is outstanding, the higher the principal balanceIf the borrower moves out of the property or passes away, the mortgage ends and the principal balance is due in full- Additionally, if a borrower is required to live in an assisted living facility for one year or longer then the borrower is no longer considered to live in the property and loan balance is due in full
A reverse mortgage is typically paid off by selling the property that is mortgaged and using the proceeds from the sale to pay off the loan but in some cases the borrower or the borrower’s heirs may decide to pay off the loan with other fundsThe borrower must also stay current on all property tax and insurance expenses. Failure to do so could result in default or foreclosure which could require the borrower to pay off the outstanding mortgage balance in fullClosing costs for a reverse mortgage are the same as for a normal mortgage including a lender origination fee, appraisal report fee as well as other closing costs such as escrow and title fees- The lender, escrow and title costs are typically financed which means they are included in the loan amount and paid for with the initial proceeds from the reverse mortgage
- You are typically required to pay for the cost of the appraisal report and the FHA-required reverse mortgage counseling class up-front
Most closing costs for a reverse mortgage are regulated and there are limits on the total fees that can be charged- The lender origination fee for a reverse mortgage is capped at 2% of the value of the property up to the first $200,000 and 1% of the property value greater than $200,000. There is an overall cap on reverse mortgage lender origination fees of $6,000 but their is no minimum fee
- Borrowers should negotiate with multiple lenders to receive the reverse mortgage with the lowest possible lender fees
Reverse mortgage borrowers are also required to pay an up-front and ongoing annual FHA Mortgage Insurance Premium (MIP)- If the ratio of the beginning mortgage balance to the initial principal limit (the size reverse mortgage mortgage you initially qualify for) is 60% or less, the up-front MIP equals 0.5% of the property value. If the ratio is greater than 60.0%, the up-front MIP is 2.5% of the property value
- The ongoing annual MIP for a reverse mortgage is 1.25% of the mortgage balance, calculated on a monthly basis
- The borrower does not pay for either of these fees out of pocket as the up-front MIP is included in the closing costs which are financed as part of the reverse mortgage and the ongoing annual fee is added to the mortgage balance
Lenders also charge a monthly servicing fee which is included in the mortgage interest rate and added to the mortgage balance over the life of the loanAbout the author
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