How Does A Reverse Mortgage Work - What Are The Costs

The compound effect can be a surprise for many seniors, who may have thought that the reverse mortgage loan is a free lunch. But the way how does a reverse mortgage work is, that all expenses will be paid back at the same time, after the home is sold.

1. A Senior Will Not Pay Anything Back Monthly.

When the idea is to bring a senior more disposable money to cover his expenses, he will not pay back anything on a monthly basis. If a senior has usual mortgage loan left, he will pay it away with the reverse loan, which means additional extra money every month.

But how does a reverse mortgage work on a monthly basis? Actually a senior must be careful with the costs, because the compound effect is working all the time and will raise the loan sum, especially if the interest rate is increasing.

2. The Mortgage Insurance Is Compulsory But Helpful.

Before a senior can get the reverse loan he has to take a compulsory mortgage insurance. When all the costs and the loan capital will be paid back, when the loan will be closed, it can happen in some cases that the home selling price does not cover all the costs. In this case the mortgage insurance will pay the missing part.

This means that the borrower will never owe more than the value of his home, that is a maximum sum. Another important thing is, that the other assets of the borrower will not be used to pay the reverse mortgage loan. A third thing is, that these loans are sure businesses for the lenders. This is important, because it makes the lenders to market these loans actively.

3. The Closing Cost Structure.

How does a reverse mortgage work - how the closing costs will be shared between different items? The mortgage insurance represents about 39 % of all costs, the origination fee also 39 %, the title insurance 14 %, the appraisal 4 %, the counseling 1 % and other costs 3 %.

The two costs, which must be paid out of pocket are the appraisal and the counseling costs. The mortgage insurance is 2 % to the property value up to the HUD property value limit. This insurance means that the HUD will take over the loan, if the borrower will become financially troubled.

The title fee guarantees the legal ownership of the home owner and is compulsory for both reverse and usual mortgages. The appraisal establishes the legal value of the property. A usual FHA appraisal costs $ 475 - 550 depending on the state. Remote locations and special properties tend to cost more. Other closing costs include the counseling, wire fee, flood cert and the credit report.

4. The Origination Fee.

The origination fee goes to the lender. This is the FHA formula, how the lender can earn. He will get 2 % of the first $ 200.000 and 1 % of the next $ 200.000 of the property value. Additionally there is an absolute maximum of $ 6.000 and minimum of $ 2.000

The borrower can choose, just like with the usual mortgages, does he take adjustable or fixed interest rate. About two thirds of the borrowers have taken adjustable rate reverse mortgage loans.