Reverse Mortgage Fees
The costs you will pay to take out a reverse mortgage can be substantially higher compared with other forms of borrowing against your home equity. Borrowers must pay an origination fee, an upfront mortgage insurance premium, ongoing mortgage insurance premiums (MIPs), loan servicing fees, and interest. The federal government limits how much lenders can charge for these items, but the origination fee, in particular, can be high it’s capped at $6,000.
These fees might not be immediately obvious to seniors contemplating a reverse mortgage, because they are often paid from the money you borrow. That means that you won’t necessarily receive the money and then have to pay it to the lender, which can hide the fact that you are paying it. In practice, this process means that fees and interest are taken out of your home equity.
You Should Add Co-Borrowers
It’s also important to pay attention to the residency rules when you take out a reverse mortgage. A reverse mortgage must be taken out against your principal residence, which is the place where the spend the majority of the year. If you leave this residence for six or 12 consecutive months, even if for medical reasons, your lender may end your reverse mortgage and demand that you sell your home to pay off your debt.
This can be a particular problem for married couples who live together, but only one of whom has their name on the reverse mortgage documents. In this case, the spouse may be forced to sell their home to pay back this debt while they are still living in it. To avoid this outcome, you should make sure that you add your spouse as a co-borrower, or at least make sure you can prove they qualify as an eligible non-borrowing spouse.
You Have Obligations
When you are working out whether a reverse mortgage can support you in retirement, you should factor in the cost of property tax and homeowner’s insurance. Most reverse mortgage lenders require borrowers to stay up to date on both of these. That’s because your house is their collateral for the loan, and if it is damaged it may not sell for the fair market price, and that means the lender won’t get their money back.
In other words, after taking out a reverse mortgage you will have obligations to your lender. And if you don’t fulfill them, your lender may foreclose on your loan. This is a real issue with reverse mortgages.
In recent years, according to a 2019 Brookings Institution paper on reverse mortgages, 18% of reverse mortgages ended in foreclosure. Sometimes it’s because the property taxes hadn’t been paid. but most often it was because the homeowners no longer lived in the home.