How to Save Money on a Reverse Mortgage
Reverse mortgages work differently than a regular forward mortgage. With a reverse mortgage you have no monthly payment and your loan balance increases over time, so the exact opposite of a regular mortgage. Despite these differences, the process to choose a lender for both types of loan is essentially the same. It is important to shop multiple lenders and negotiate the best loan terms.
With a fixed rate reverse mortgage, the interest rate is the same for all lenders but you can still save money by finding the lowest closing costs. Additionally, for an adjustable rate reverse mortgage you may be able to lower your interest rate and closing costs by comparing several lenders.
There are some other measures you can take to reduce the upfront and ongoing costs of a reverse mortgage including choosing a lower loan amount, selecting a fixed rate loan, making sure your property is in good shape so you avoid multiple appraisal fees and taking a free required counseling class.
Another important point to keep in mind is that lenders make a lot of money with reverse mortgages. This means they may be more willing to negotiate with you including offering discounted transaction costs or a rebate at closing. Both of these incentives reduce your expenses when your loan closes which saves you money.
Below we highlight several tips on how to save money on a reverse mortgage. A reverse mortgage can be a little confusing at first because it is so different than a regular mortgage, or any loan for that matter. There may be fees or line items that you have never seen before but that doe not mean you should spend more money than you should. Ultimately, like with all mortgages, you want to find the loan with the lowest combination of interest rate and fees. Follow the steps below to understand how to successfully shop for a reverse mortgage and get the best terms possible.
Shop for the Best Interest Rate
Just like with a regular mortgage, you should shop for your reverse mortgage to make sure you get the lowest interest rate. We recommend that you compare reverse mortgage proposals from three-to-four lenders to find the lowest rate.
There are two types of reverse mortgage: fixed rate and adjustable rate. The interest rate for a fixed rate reverse mortgage is typically the same across all lenders but borrowers can choose to pay discount points to lower their rate. There is more variation in lender fees and closing costs so borrowers should shop lenders to find the reverse mortgage with the lowest combination of interest rate and costs.
The interest rate for an adjustable rate reverse mortgage can vary across lenders and is determined by adding the margin to the index. For example, if the index is 2.000% and the margin is 1.500%, then the interest rate you pay on the reverse mortgage is 3.500%. The index is a a fixed number that is usually the same for all lenders but the margin varies. When you shop for an adjustable rate reverse mortgage make sure you find the lender that offers the lowest margin as this will result in you paying a lower interest rate.
Use the FREEandCLEAR Lender Directory to find lenders that offer reverse mortgages.
Negotiate Lower Fees
Lenders make a lot of money over the course of a reverse mortgage so borrowers may be able to negotiate lower upfront fees. The origination fee is the upfront cost that a lender charges the borrower to process the loan. You may be able to negotiate with the lender to eliminate or reduce this fee -- they are making enough money on your loan already. Additionally, you may be able to get the lender to pay for or reimburse at closing other upfront fees such as for the appraisal or title reports. Borrowers should compare several proposals and be prepared to negotiate specific fee items to find the reverse mortgage with the lowest fees.
Review our comprehensive Reverse Mortgage Guide to understand how the program works and the costs you are required pay
Only Borrow the Amount of Money You Need
Because the borrower does not make a monthly mortgage payment with a reverse mortgage, the loan balance increases over time. The less money you borrow, the lower your reverse mortgage balance is at the start, over the course of and at the end of the loan, when the balance is due in full when the borrower sells the property or passes away.
The amount of reverse mortgage you qualify for depends on many factors including your age, the value or your property and the type of loan you select. You are not required to borrow the full amount of the reverse mortgage you qualify for and you should borrow only what need based on your financial objectives. Do not let a lender push you into taking a larger reverse mortgage amount than you need as a lower mortgage amount will save you money and help you preserve equity in your property in the long run.
Choose a Fixed Rate Reverse Mortgage
If you select a fixed rate reverse mortgage, your interest rate does not change or increase over the life of the loan. At the start of the loan, the interest rate for a fixed rate reverse mortgage is typically higher than the rate for an adjustable rate reverse mortgage. If interest rates increase in the future, however, the rate for an adjustable rate reverse mortgage will likely be higher than the rate for a fixed rate loan. The higher the interest rate, the faster your reverse mortgage balance increases over time.
A borrower can eliminate the risk of an interest rate increase and potentially save money in the long term by selecting a fixed rate reverse mortgage. The downsides are that the interest rate is higher in the beginning of the mortgage, the borrower qualifies for a lower loan amount and has fewer disbursement options.
Review Reverse Mortgage Program Options: Fixed Rate or ARM
Make Sure the Property is in Good Condition
When you apply for a reverse mortgage, lenders order an appraisal report to determine the value of the property. The borrower is responsible for addressing any repairs or renovations identified in the appraisal report and then must pay for the appraiser to re-inspect the property to confirm that the issues have been addressed. The borrower should perform any major property repairs or renovations prior to applying for the reverse mortgage to avoid paying multiple appraisal fees which, can cost hundreds of dollars.
Understand Reverse Mortgage Pros and Cons
Ask About Free Counseling Classes
In order to qualify for a reverse mortgage you must complete a counseling class offered by a government-approved counselor. The reverse mortgage counseling class typically costs $100 - $175 but certain HUD-approved reverse mortgage counselors use HUD grants to offer free counseling classes. You can save money by taking a free counseling class but it may take more time to find and complete these classes due to greater borrower demand.
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Sources
“How much will a reverse mortgage loan cost?” CFPB. Consumer Financial Protection Bureau, August 30 2019. Web.