Reverse Mortgage Fees Explained Why So High

[@nofluffDIY]

I have watched about 30 youtubes on RM and spoken to 3 consultants. I am also among the world's greatest technical information designers (the time for quibbling is over, plus at least I have your attention this far). The content and clarity of this video put it in the "Mount Rushmore" level for RM information. Thank you for making it. Viewers should not be fooled by it low-luster production methods (it has no photographic/talking-head video). It answers my 'bottom-line' question that the other experts have hedged and stammered to answer: "What are the complete costs---total cost of ownership over time---of HECM vs other ways to tap into my home's unrealized equity???" I'll paraphrase the answer that Kevin arrives at: other methods might be less expensive than HECM at the end of the earlier years ("2 years" in his example), but the high cost incurred by the FHA-required insurance can be far outstripped by the interest savings over longer periods of time. An accurate, apples-to-apples evaluation of the respective interest rates must be considered. Great work, thanks, and I'll have some separate questions.

[@nofluffDIY]

What is "POC" in the column headings at 5:48? And why are they a separate column and paid by borrower? (Perhaps all one answer.)

[@KevinWaltonReverseMortgages]

Hello Jack, the POC means paid outside of closing, these charges are not allowed to be financed into the loan and must be paid upfront by the borrower. The POC fees are the appraisal and borrower counseling. The loan consultant is not allowed to steer borrowers to a specific appraiser and counselor -a zero tolerance coercion rule. The selection for the appraiser is done by an appraisal management company, or AMC, and the borrower selects the counselor from a list provided by the lender. Since these two fees are treated differently and can't be financed into the loan, they are listed in a separate column.

[@nofluffDIY]

Is there a specific name for the type of non-HECM loan you are using in your example at 10:04? For instance... HELOC or cash-out refinance? Does it matter?

[@KevinWaltonReverseMortgages]

The industry calls the non-HECM loans "proprietary loans". Each lender has created their own names for these loans such as Homesafe, or Platinum to name a few. But rather than promote one loan over the other, I lump them into non-HECM loans. There are only less than 5 lenders offering these loans currently with most of the guidelines being very similar - no drastic differences between them. Excellent questions! My low luster production needs improvement indeed, but I also don't want to come across as a too slick salesy type either. Transparency is key.

[@skyeleone6581]

Very clear helpful explanation

[@brianbarns8675]

Thanks Kevin. I only need to tap my equity for 3 years to let my 401K grow more and get the max SS benefit at 70. The property is FAC and I have no debt. I can you savings and funds from equity to make minimum payments so I avoid the compounding interest on the Reverse Mortgage. I am worried about the origination costs of a Hecm so would I be better off with a heloc? I am in NY.

[@KevinWaltonReverseMortgages]

Thanks for the question Brian. In the short term, the HECM can be expensive. There are other non-HECM reverse mortgage loans that are much less expensive to originate the loan, in exchange the interest rate is higher. You may want to check into those options. A HELOC is less expensive to originate, sometimes no charges. The thing you need to know on the HELOC is that the bank can close out the HELOC at any time due to the property values dropping and they don't need your consent to do it. You would need to check to see how long the HELOC stays open as well, typically they close out after 10 years ( you can't use them anymore). The HECM can stay open for the rest of your life. People are living longer, you may not think now, you need the HELOC or reverse for only three years, but things can happen. The HECM can serve as a standy line of credit ready to use as long as you are alive. Again upfront costs can be expensive but spreading them over your lifespan it can make sense, plus having the piece of mind, if property values drop, the HECM reverse lender can't close the line for this reason can be a nice thing to have.

[@Itsme-vo4fx]

My understanding is that the $400,000 reverse mortgage (for 5 years with no monthly payments) will require a final payment of approximately $700,000. What is the advantage of a reverse mortgage over putting on a normal bank mortgage of $400,000, using the equity on your existing home.

[@KevinWaltonReverseMortgages]

For a 78 year old person, today's age, with a fixed rate of 7.56% reverse mortgage after 5 years the balance would very close to $600k. On the adjustable reverse mortgage line of credit, it's hard to say since it depends on where rates go. But at current rates, that balance for a 78 year old would also be just over $600k after the 5th year. Loan amounts are calculated on age of the youngest borrower, equity position and prevailing rates. Loan amounts are unique to the individual(s) From a math point of view it may not make sense to do for some people. If a borrower(s) can income qualify for a conventional loan and make monthly mortgage payments, than that may be better. However, for others making mortgage payments while in retirement, while possibly taking a cut in income, for whatever reason, can cause people to have to either sell their home, or live on a tight budget for the rest of their lives while in the home. If there is an abundance of equity, a reverse can extinguish the existing first mortgage payment giving a better quality of life and not have to make another mortgage payment for the rest of their life while living in that home. To some comfort is more important than paying off the balance of their existing mortgage. It isn't always about the numbers. Affluent people with paid off homes use the reverse mortgage line of credit for a myriad of reasons. Paying for health care expenses, buying other property, fixing up their home to fit their existing needs, etc...The available line of credit, not used, grows each month into more funds to use, if needed, for the future. It gives a bucket of funds, not in the market to dip into when investment markets go sideways. Definitely not saying the reverse mortgage is for everyone, but it can be a game changer for others. Thank you for your question!

[@Itsme-vo4fx]

@@KevinWaltonReverseMortgages : The way I look at it is; No matter, a reverse mortgage or a traditional mortgage, you will need to pay the loaner. The question is, when all is said and done, which one will cost me more out of pocket with the least risk of foreclosure? It may be just me. However, there seems to be more “fine print” and risk with the reverse mortgage scenario. The reverse mortgage is being advertised as a “tax-free loan”. Aren’t all loans “tax-free”? I have never paid taxes on a traditional mortgage.

[@KevinWaltonReverseMortgages]

@@Itsme-vo4fx Yes, at some point the lender gets paid in all cases. The reverse mortgage with its compounding interest will cost more in the long run, and interest rates are inherently higher on these loans vs. conventional loans (where you need to fully income qualify to obtain the loan, and are required to make monthly mortgage payments.) The FHA HECM reverse mortgage requires MIP insurance in order to get the loan. It serves as gap insurance. If in the end you owe more than your home is worth, the insurance pays the difference. This insurance is required on all FHA loans, including the 3.5% down payment home purchase FHA loan which is available to everyone who can qualify for a home loan (no age limitation) not just the FHA HECM reverse mortgage, but it is expensive. Watch my fees video and you will how that works. There are other non-HECM reverse mortgages that don't require this insurance but the interest rates are higher and in the long run the mortgage balance will increase more rapidly due to the higher rate. As for the risk of foreclosure, on a conventional loan if you fail to pay your property taxes, can't continue to pay your mortgage payment or if the property falls into severe dilapidation the lender can foreclose on your home. With a reverse mortgage monthly mortgage payments are not required, although many people do make payments, either in smaller amounts or periodically. Since monthly payments aren't required, you will not lose your home to foreclosure for this reason. Reverse lenders can foreclose just like conventional lenders, if you fail to pay property taxes and if your home becomes a dilapidated health and safety risk to live in. There is very deceptive advertising on reverse mortgages. The reverse mortgage does allow you to tap your home equity whenever needed, with an adjustable line of credit loan, but it is not income. It is leveraged money (borrowed). You do not pay income taxes on this money since it isn't earned income. The lenders who say the reverse is "tax free" income, need to be careful as to not mislead people. A homeowner can be responsible for still having to pay their property taxes, making the "tax free" statement misleading. Great questions!

[@daleschaefer2444]

Lender Paid Broker $9,707.49. I noticed that this fee was not passed the borrower. Is that the normal way the Lender fee is handled. I thought that fee would be added to the borrower. Please explain.

[@KevinWaltonReverseMortgages]

Hello Dale and thanks for the question. Loan Originators on certain types of reverse mortgage loans can get compensation from both the borrower and the lender they place the loan with. In this example, this is a brokered loan. I am not the lender who has the money to give you, I find a lender for you, and they compensate me based on the interest rate that the borrower and I agree upon, on the loan. In this example, I didn't not charge the borrower an additional loan origination fee to do business with me. The lender paid compensation is not part of the closing costs, it's pointing out how much they are paying me based on that particular interest rate. I can charge an additional loan origination fee to my customers, that does get added to your closing costs. In this example I chose not to. On some loans, it may make sense to buy down your interest rate on the loan and pay additional origination fees. It depends on the transaction. In the interest of time since the video is so long, I chose to present the information with zero additional origination (borrower amount) fees charged to the borrower. However, all borrowers should be asking this exact question you asked and be given examples of both charging additional borrower origination fees and not charging them to see the difference on how it affects your effective interest rate and the loan term interest accumulation on the loan over time.

[@randolphh8005]

We have a HECM, and we payed it off, leaving a line of credit now growing at 4.5%. Our balance is $500. It’s growing in value at $1000 per month for a monthly fee of $2-3 (yes single digit!) for ongoing interest and insurance payments approaching zero when minimal balance. You must maintain a minimal amount to keep the LOC open. Our intital closing costs were about $10k which included some lender CREDITS. BTW you need to shop around because fees and credits vary substantially, only the mortgage insurance fee is set by law, but again lenders can give credits. The purpose of paying it down was to get the line of credit for future emergencies and large cash needs. The hope is not to access it for 10-15 years, and allow it to grow, and then have the flexibility to use it as needed. Also remember funds are tax free, so it can also be used to manage tax brackets. The other way to use it is to access funds in years of large stock losses to help with sequence of return risk, meaning not having to draw down accounts with larger losses, thus giving them a chance to recover. I find the fees to be quite reasonable over time in our scenario where we don’t use the money up front. The LOC can’t be cancelled as long as we pay taxes and insurance and one of us is in the home. We also retain title, but have access to a large part of our home equity, while likely still being able to sell home in future with positive equity. This strategy is recommended by Wade Pfau PhD who is a retirement researcher and does not sell these. Also be aware these are non-recourse loans, meaning you can never be “upside down” We have already had our LOC increase in value more than we paid in fees less than 2 years ago. You can also do these and get a monthly payout, or have your monthly payments go away, but those are slightly less desirable options, although still good for some scenarios.

[@warrenthomas9068]

Only on American Reverse Mortgages.............Canadian Reverse Mortgages are well regulated by the Federal Government. Under Canadian Law, when the time comes to sell your home, you can not owe more than the value of your home. NO MIP OR PMI premiums. Don't blame me, you are the ones that don't want the government involved in you lives.

[@randolphh8005]

Read my post. I love Canada! But, let’s see which country is better on “freedom” over the next decade.

[@nofluffDIY]

(Wow, we proved that there is no subject matter that cannot find a fault line, no matter how buried.) The main on-topic matter that occurs to me is how the Canadian system protects lenders against what we Americans seem to be paying for, per loan: the risk of under-water situations. Perhaps such losses are paid for out of more general taxation (money never comes from 'nowhere'), or market forces alone cause such risk to be built into the offerings.

[@jcw9396]

Great job thanks

[@KevinWaltonReverseMortgages]

Welcome!

[@shelleycharlesworth5177]

I am a 76 year old widow- retired- and I own a home free & clear worth $2 million [ maybe even $2.5 million ]. I have no children or debt and I think that I only want a reverse mortgage for $300K. I do have some savings and some investments totaling about $500k Would a reverse mortgage of $300k be a good idea for me? I want to know what I will owe if I decide to sell my house in 3 or 4 years. Will it now be $355,000, $450,000 $ or ?? On a $300,000 loan?

[@KevinWaltonReverseMortgages]

Hello Shelley, thank you for your questions. Homeowners with ample equity consider reverse mortgages for a variety of reasons, it depends on the situation. Short term, they can be expensive, the longer you keep them, the numbers work better due to all the upfront fees for the loan are fully earned at closing. I can do a worksheet for you on three types of reverse mortgages, a fixed rate HECM where you get all the funds/cash out at once, an adjustable line of credit HECM where you pay on what you use, and a non-HECM line of credit and fixed rate which have higher interest rates but is less in upfront fees and at times may be better in short term situations. I can compare all of them for you and give you time horizons for a loan of $300k over 3 and 4 years. Assuming you would like a net $300k cash out, on the HECM fixed rate after three years you could expect the balance to be @$477k and after 4 years @$519k, assuming you make no monthly payments to pay it back at an interest rate of 7.81%. The non-HECM fixed rate at 8.99% after 3 years would be @$454k, and after 4 years @$497k (less upfront fees gives the lower balance, even at the higher rate-but after 5 years the tide turns). Line of credit loans are more difficult to gauge since the interest calculates only on what you use, if you were to take the full $300k upfront, I could do some figures for on those as well. A few things, what state is the property located? The non-HECM reverse mortgages are not available in all states. Feel free to email me at [e-mail] or we can chat as well 805-276-1942. Be well, and again thank you!

[@shelleycharlesworth5177]

@@KevinWaltonReverseMortgages -ok thanks for your informative reply. So I guess if you are really SURE you want to stay in your home, you are a better candidate for a reverse mortgage. I will email you later. Thanks again.

[@beachbumfic]

sorry you talk too slow

[@larryjones9773]

Click on Settings, and change Playback speed to 1.25.