Recently, I heard from a reader about reverse mortgages. The reader astutely observed that the costs associated with a reverse mortgage (or HECM) could be eliminated by putting a family-funded mortgage into place. This would require an attorney to draft the legal documents that would spell out and secure each family member’s future interest in the property, but those fees would likely be lower than the costs associated with a HECM.
I asked Jaxzann Riggs, owner of The Mortgage Network to weigh in on the topic. “Absolutely,” she told me, “a family-funded reverse is preferable to a traditional reverse if the homeowner has a family that is able and willing to be the lender.”
Reverse mortgage closing costs are very straightforward. A borrower should expect to pay, on average, a 1% origination fee and a 2% initial mortgage insurance premium, plus closing costs and third-party fees such as appraisal, title, settlement and recording fees.
Jaxzann told me there is a difference, however, between closing costs and the actual expense of a reverse mortgage. The expense is far more difficult to calculate because it would require concrete information about the future value of the home, the duration of the occupancy (how long will the owner live in the home), and how much the homeowner will draw now and in the future from the home’s equity. A homeowner who decides to sell the home within a few years after creating a reverse mortgage would find it to be VERY expensive.
If a borrower rolls $10,000 of closing costs into the loan balance and then sells the home after one year, the cost of selling (without calculating and adding the interest and mortgage insurance accruals) would be the full $10,000. If, on the other hand, the homeowner lives in the home for 20 years, the initial cost spread out over the life of the loan would be approximately $500 per year. The future appreciation or depreciation of the home is critically important when attempting to calculate HECM expenses because, unlike a family-funded reverse, FHA HECMs are non-recourse loans meaning that if the home is worth less than the dollars owed at the time of sale, the borrower or heirs are not responsible for the deficiency. If the home does not appreciate much (or depreciates), a HECM can be very inexpensive.