Reverse Mortgage: The True Truth

Years ago I heard the term “true truth,” as in, “there are many truisms, but here’s the true truth.”

I love this concept, and it applies nowhere as well as it does to my field, Reverse Mortgage.

If there is anything anyone “knows” about Reverse Mortgage – technically called the FHA HECM – it’s that closing costs are high. I want to take a couple minutes to address this perception by comparing the HECM’s closing costs with closing costs of conventional forward home loans.

The first thing to note is that closing costs on the HECM are regulated by HUD. This is not true of conventional mortgages, where the lender can charge handling fees, points, and back-end fees, to name a few.

Let’s start by looking at fees that are part of any loan.

The first set of fees are called “third-party fees,” and include things like transfer taxes, title search, recording fees, and appraisal fees. These fees are not determined by the lender – which is why they are called “third-party” fees.

The table below compares fees for a home in Virginia valued at $350,000.00. These numbers come straight off actual settlement statements.

The second fee, if we’re looking at FHA loans, is the Mortgage Insurance Premium, or MIP. This is not a lender’s fee, but rather is collected by the lender on behalf of the FHA. For the FHA HECM, the MIP is 2% of the appraised value of the home. For a forward FHA loan, it is 1.75% of the loan amount.

When people state that reverse mortgages are expensive, it is the cost of the MIP they are referring to – even if they don’t realize this is the cost they are referring to.

However, the MIP is arguably the most important part of any FHA HECM. It is the MIP that creates the “Four Nevers” of Reverse:

1)     Homeowners never give up title to their home;

2)     Homeowners never have to move;

3)     Homeowners NEVER can get upside down on their Reverse;

4)     Homeowners never have to make a payment, as long as the home remains their primary residence.

Even were the home to fall in value, or were the homeowner to live to extreme old-age, there is never a shortfall assessed to the homeowner, his children, heirs, or estate, or to any other entity. Just as we all pay into automotive insurance but not everyone will wreck his car, every reverse mortgage holder pays into the MIP pool – but not everyone will outlive his actuarial table. The MIP is there to protect the homeowner, his heirs and his estate from the possibility of owing more than the home can repay, once the senior homeowner no longer needs the home.

The MIP also plays a remarkable role in the case of the monthly stipend product: it guarantees that the monthly stipend will continue to come in, EVEN IF the homeowner lives to be, say, 135 years old. Now that’s pretty cool.

There is also a newer FHA HECM product line called the FHA Saver. These have greatly reduced MIP costs. The tradeoff with the Saver is that it makes available a smaller loan amount. The deciding factor between choosing the HECM Saver or the HECM Standard comes down to suitability: the product needs to fit the homeowners’ long-term needs.

The final fee is the origination fee. This is a lender’s fee, and it covers the lender’s overhead costs. However, unlike other loan products, HUD controls what can be charged in the way of the origination fee: it cannot go above $6,000.00 no matter how high the appraisal comes in. Here in the greater Washington, DC region, many of our property appraisals come in well above the national average. However, the origination fee is still capped by the feds at $6,000. On forward loan products, there is no such cap on lender’s fees.

The formula for calculating the origination fee is the following: 2% of the first $200,000 of the home’s appraised value, and 1% of any additional value, up to a ceiling of $6,000.

Unlike forward loan products, including forward HELOCs, closing costs for a Reverse are enfolded into the loan amount. This means there are not out-of-pocket closing costs, and the senior does NOT bring money to closing.

Let’s step back and consider what all of this means to older homeowners:

1)     For decades they have pumped money into their home. But now they’re approaching retirement, or have already retired. They need more cash flow to cover daily needs, and they cannot continue working indefinitely, or cannot realistically go back to work. HOWEVER, they now can draw funds as needed, and use them to cover unexpected expenses, meet financial goals, provide for the needs of extended family, pay down debt, buy a second home, or for any other use.

2)     Unlike other financial products, they never make a payment as long as they remain in the home. This is of HUGE benefit to seniors – no payment to meet means no payment to fall behind on. It also means they can use their income to meet daily needs, rather than to service a loan.

3)     They are fully protected from liability. As long as they use the home as their primary residence, remain current on their property taxes and homeowner’s insurance, and maintain upkeep on the property, they can stay in the home as long as they wish.

4)     Because this is a financial product designed specifically to meet the needs of seniors – and address the realities they face – there are no credit or employment requirements.

So this, then, is the true truth about the FHA HECM. As the daughter of an elderly mother, and as a professional in the field of Reverse Mortgage, I can categorically state there are few products, services, or programs available that provide as profound a benefit to the senior homeowner.

Call me with questions – I always love hearing from you, and I love talking about how the FHA HECM can benefit those you love.