How expensive is a reverse mortgage?

Many people who has not researched a reverse mortgage will say that they are too expensive. When you ask them what they mean by "too expensive" they really do not have a detailed explanation. That's not unusual though, its common for people to get a concept in their head and then just quote it as true. Its human nature.

So lets address the two major costs of a reverse mortgage and find out the truth. The two major costs are the origination cost and the MIP (Mortgage Insurance Premium). We will cover the origination today and the MIP tomorrow.

The origination cost.

The loan origination on a reverse mortgage can be up to 2% of the loan. This is the maximum for the HECM product line (Maximum allowed by HUD). On a loan of $250,000 this cost can be up to $5,000. No wonder people cringe when they see that number. That is a large up front cost. The question is, "Is that expensive?"

The answer is no.

Banks either make their money on the front side of the loan (charging points or origination fees), or on the back side (charging higher interest rates). If you know anything about home loans, you know that you can "buy down" they interest rate by paying up front points.

Now lets consider the HECM reverse mortgage. This loan is an adjustable loan that is set at the treasury bill plus 1.5%. Most home loans are set on LIBOR (the London interbank exchange rate). The value of the reverse mortgage is that it is set against the government's credit rating, not an international bank's rate. Today LIBOR is 3.07% and the 1 year treasury bill is 1.67%. The other component which is the interest above the rate, which for the reverse mortgage is 1.5%.

So here is the test. Go into your bank and ask them for a mortgage loan with an interest rate of the 1 year treasury bill plus 1.5%. After they say no, tell them you are willing to pay up front points to get the loan. When they come back to you a few days later, you will find that it costs you much more than 2% to get that rate.

So in the end, you see, the reverse mortgage origination fee is not "too expensive". It does cost a significant amount of money, but you are buying the rate. Just like many other things in a reverse mortgage, the costs are all up front. It may look expensive, but in reality....its a good deal, a government entitlement for seniors.

Bob

bob@az62.com

www.az62.com

623-214-6663