A bad rap reverse mortgages have taken is the belief that their upfront fees are too high, writes Inman’s “Mortgage Professor,” Jack Guttentag. The idea is tied to the belief that reverse mortgages are relative to standard mortgages, when in all actuality the two have little in common.
Unlike a standard mortgage, reverse mortgages are hassle-free for borrowers as they do not require scheduled monthly payments, however, there exists a greater risk for lenders and insurers of such loans.
On HECM reverse mortgages, there is no first line of defense against loss. The lender/insurer has only the second line of defense to protect against loss—the sale of the property—AND it cannot exercise this option until the borrower dies or moves out of the home permanently.
The difference in the upfront premium is a little larger—on a HECM it is 2 percent of property value and on the standard mortgage it is 1.75 percent of the loan amount. But HECM borrowers can avoid the upfront premium almost entirely…
This leaves the upfront mortgage insurance fee, which is slightly higher on HECMs than on standard mortgages. It is a small price to pay for a unique hassle-free mortgage with no required payment. Furthermore, HECM borrowers who want to leave a little more equity for their heirs don’t have to pay this charge.
Homeowners who want to leave more equity for their heirs, Guttentag notes, can elect the “Saver” version of a reverse mortgage that scales down the amount borrowers can draw. This option allows reverse borrowers to reduce the upfront premium from 2% to 0.01%.
Written by Jason Oliva