It wasn’t that long ago that everywhere you looked you found an article about how expensive reverse mortgages were. Many borrowers were put off by a loan that had the regular loan costs and then the mortgage insurance costs added as well that could total ten thousand dollars or more on top of that. But if you have not looked at the reverse mortgage for the past several years and always thought it might have been a good option for you other than the costs of the loan, now might be a good time to take a second look.
Here’s why. Because of the HUD changes in the way borrowers can access their funds in the first 12 months, many borrowers’ initial mortgage insurance premiums dropped from 2.0% to .5% a couple years back (although it has gone up to 2.5% for borrowers needing most or substantially all of their benefits in the early term but even that can be over-come and I will explain that later). So the initial mortgage insurance premium that was running $10,000 on a home valued at $500,000 under the old parameters dropped to $2500 – a huge savings for borrowers who take 60% or less of their initial benefit in the first 12 months.
Another way borrowers are saving money is by taking the funds they will use in the first 6 months anyway at the closing and letting the lender waive origination fees and possibly even pay other costs. I would never advocate that a borrower takes funds on their loan that they do not need and did not intend to take anyway, but if you know that you plan to draw funds in the first 6 months after you obtain your loan to do home improvements or for other purposes anyway, and you can save thousands of dollars in expenses by doing it at closing, why not?
Reader tip: See what you may qualify for using this free online calculator at https://reverse.mortgage/calculator (no personal info required)
It makes no sense to draw money and pay interest on borrowed funds if you don’t have a need for them. However, if you have an immediate need for money from the reverse mortgage (within the first 6 months) you can often get a better deal including no origination fee from the lender if you take those funds at the time you close your loan. It doesn’t make sense to take money you don’t need but if you are going to take it in the first 6 months anyway, why not ask your originator what discounts you can receive by taking those funds at the closing. You may find that you can save thousands of dollars just by taking the draw a month or two earlier than you planned to anyway.
And then, for those borrowers who are taking larger initial draws, lenders are often able to pay some or all of their closing costs, sometimes including that higher initial mortgage insurance premium I mentioned of 2.5%. There are times when borrowers have all of their normally financed closing costs paid for them on reverse mortgages these days with a lender credit so that the borrowers’ total costs for the loan are $600 or less.
A lender credit is just that; the lender is giving you a credit or money to pay your costs based on the fact that they believe they will recoup that cost later. This is not money they add back into your loan amount so you really pay it – it is money that they take out of their pocket and put toward your expenses and you don’t pay those costs.
So if you have always wondered if a reverse mortgage would be good for you or would have been good for you or your family but the costs were just too high, now is great time to give them a second look. It costs nothing to get a no-obligation quote and you just might be very happy you did.
HUD has changed the way borrowers can access their funds so that if you are not using the majority of the funds to pay off existing liens on the home, you will probably be limited to 60% of the amount available to you in the first 12 months’ time. Then you may access any remaining funds after that 12-month period. And this is a bit misleading because the calculation HUD uses actually lets you take the property charges plus 10% of your line or 60%, whichever is greater.
Michael Branson is the CEO of All Reverse Mortgage® and blogger at https://reverse.mortgage