NerdWallet Breaks Down Reverse Mortgage Fees

Personal-finance blog NerdWallet presented a straightforward, unbiased look at reverse mortgage fees this week, with the help of two industry heavyweights.

Paul Fiore, executive vice president of retail lending at American Advisors Group, and Dan Hultquist, author and director of education at ReverseVision, teamed up to lay out all the fees that potential Home Equity Conversion Mortgage borrowers should consider before initiating the process, from counseling to the Mortgage Insurance Premium.

NerdWallet writer Deborah Kearns splits the expenses into two categories, upfront and ongoing, with a naturally longer list of one-time fees. She quotes an average counseling fee of $125 and appraisal fees of $300 to $500 — depending on the size of the home — and then walks readers through the MIP and origination-fee structure.

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“Expect to pay either $2,500 or 2% of the first $200,000 of your home’s appraised value (whichever is greater),” the article advises, noting that borrowers also typically pay 1% of the amount over $200,000.

The article additionally tells potential borrowers to request a full list of all third-party closing costs, such as credit checks and title insurance, and reminds readers that they can choose their own title company regardless of which firm the lender recommends.

Continuing into ongoing fees, Kearns dutifully covers the annual MIP, the $30 to $35 servicing fee depending on the type of loan, and long-term costs associated with maintaining the property and staying current on property taxes. While not referring to it by name, the piece refers to Financial Assessment guidelines that require borrowers to prove they can cover these key ongoing costs during the life of the loan

In all, despite raising the specter of “higher costs” and steeper interest rates compared to those associated with home equity loans and forward mortgages, Nerdwallet provides a quick, all-in-one resource for those who might be curious about getting a reverse mortgage but scared of the fees — a common barrier to potential HECM borrowers.

Read the full piece here

Written by Alex Spanko

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  • The ongoing MIP is one of the most misunderstood concepts there is when it comes to HECMs. For example the following quotation is incorrect:

    “Over the life of the loan, you’ll pay an annual MIP that equals 1.25% of the outstanding mortgage balance, according to HUD. You’ll also have to pay an FHA mortgage insurance premium, which acts as collateral to ensure you receive loan advances. You can roll the MIP costs into your reverse loan, which will accrue interest for the life of the loan.”

    The quotation is wrong for two main reasons. The first reason is that FHA insurance is not collateral. The only collateral in any reverse mortgage is the home. Ongoing FHA MIP is a fee or cost of HECMs. Collateral is the asset of the borrower which is released to the borrower without liens at the end of the loan. Again MIP ongoing insurance is NOT collateral. As to the second reason, the explanation of the calculation problem begins in the next paragraph.

    For example, say the UPB at closing is $292,500. If the quotation was correct, then MIP for the first year would be $3,656. Yet the HUD calculator shows after one year, it is $3,764 when the average effective note interest rate is 5.06%. The ongoing MIP calculated by the HUD calculator rises to $3,776 for the first year when the average effective note interest is 5.76%.

    So there two simple questions. Why is the ongoing MIP charged during the year other than simple interest and why does it rise with the average effective note interest rate charged during the year?

    The first issue is that the ongoing MIP is charged monthly, not annually. Like the effective average interest rate has an annual rate of say 5.06%, it is charged monthly and that monthly rate is 0.42167%. The monthly rate for the 1.25% annual ongoing MIP rate is 0.10417% Since the monthly UPB will be greater with a higher average effective note interest rate, since the ongoing MIP is also charged monthly, when the average effective note interest rate goes up so will the ongoing MIP. (Also the accrual begins at the start rather than at the end of the month.)

    The best definition for the charging of the ongoing MIP is that it is charged monthly using an annual rate of 1.25%. Other than interest normally ongoing MIP is the largest cost overall on a HECM. It can be enormous since it runs right now at around 25% of the interest being accrued.

    However, do not be confused since older HECMs have a 0.5% annual rate for ongoing MIP. The 0.5% rate only applies to HECMs with case number assignments before 10/4/2010. For case numbers assigned after 10/3/2010, the annual rate is 1.25%.

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