What is the “real cost” of the reverse mortgage loan and how is it computed?
There are a few different ways that cost can be expressed. On a fixed rate loan, cost can be expressed as an annual percentage rate (APR) which is the amount of interest the borrower is charged for obtaining a loan as expressed by a single rate that represents the actual cost of funds after all costs the borrower paid to receive the loan have been factored in over the life of the loan.
A very simple (and not accurate but used here for example only) explanation of this is that if you borrow $100,000 but pay fees of $2,000 to receive that $100,000, your payment is based on $100,000 but you only received $98,000 after costs even though your payments are based on $100,000.
Therefore, the interest for the APR is equal to the rate that would be representative of the payment you are paying for $98,000 and not $100,000 – the APR would then be higher than your Note rate (and always is whenever there are fees on a loan).
Some people also consider the cost of the loan as a straight expression of the fees involved. The trouble with this is that with different interest rate options, those costs often can be changed as the lender may waive origination fees and the lender may even be able to pay some of the third-party costs for the borrower.
Those costs also change as the value of the loan’s lenders originate change in the secondary market (the market where the loans are ultimately sold so that lenders retain liquidity to continue to originate loans). There is no actual formula for the computation of what the lender can or cannot do for borrowers in this case, it depends on the value of the loan and current interest rates.
Costs Vary by Location
Also, you need to remember that costs vary with the area of the country in which you live. Some states like Arizona have very little title costs and no state fees to add to the recording costs. States like Florida have taxes and documentary transfer tax stamps that can run into the thousands that must be added to any mortgage transaction that add to the cost of any mortgage transaction, forward or reverse.
Reverse mortgages use a disclosure known as a TALC (Total Annual Loan Costs). The TALC disclosure is one of the disclosures that your reverse mortgage counselor will go over with you at the time of counseling. If you look at the boxes in the disclosure, you will note that the cost of the loan is very high in the first years and as time goes on, that cost begins to go down. That is because all the costs are “front end loaded”.
Avoid Short-Term Decisions
In other words, you pay the fees for the loan at the beginning of the loan. If you only keep the loan for a year, that makes the loan a very expensive loan for just a one-year financing proposition. This is the primary reason we tell people that the loan should be the last loan you every need and not a “bridge type” solution.
If you are looking for a loan to keep you for just a year or two, there are a lot of less expensive options that we would suggest as a reverse mortgage is a good alternative for a long-term loan but not so much for short term financing. The best way to see what the costs on a loan would be for your circumstances would be to visit our free reverse mortgage calculator.
This will allow you to see the costs, both interest and fees, for various options available to you based on your circumstances. Then compare those costs to different lenders to see what best meets your needs. We also caution borrowers not to fall into the trap of not considering all costs because some lenders do not list all costs in their loan proposals.
For example, I recently reviewed a proposal from another originator on which the HUD charges, the hazard insurance and the recording information were not listed. Whether they felt they did not need to list them on a proposal or didn’t have the information or what, just know that all transactions will require title insurance, HUD mortgage insurance (on the HUD HECM program which accounts for the majority of the reverse mortgages originated) and if you are in a state that requires transfer taxes and mortgage stamps, they will be part of the transaction.
The only real differences between originators should be the origination fees, the interest rates (including the margin if it is an adjustable-rate loan) and whether the lender is paying any costs on your behalf (lender credits). If there are just fees on one that do not appear on the other, it’s not a bad idea to ask about those fees because if one lender must require borrowers to pay them in your state, there is a very good chance that other lenders do as well.
When researching a reverse mortgage, it’s important to speak to your family and trusted financial advisor to weight both the pros and cons. Learn more about how a HECM loan might be right for you by contacting one of our top reverse mortgage lenders.