Many senior citizens like the idea of tapping their home equity to supplement retirement income, but are turned off by the high fees that accompany reverse mortgages. For example, costs on a FHA-insured HECM (home equity conversion mortgage)- the most popular type of reverse mortgage - will include the following:

- two percent origination fee
- third-party closing costs (title, appraisal, etc.)
- mortgage insurance (2% upfront plus 0.5% recurring on the rising loan balance)
- loan servicing fees ($30 - $35 per month for the life of the loan) and,
- interest costs.

Even many seniors who’ve take out HECM’s were surprised by the costs. According to a HUD report:

The biggest complaint mentioned by most of the participants was their surprise at the actual costs of the HECM and the fact that they did not feel they were adequately informed of these costs in their counseling sessions. As one participant noted: “They give you a ton of figures, but they never tell you it is going to cost you this much money.” Another woman said: “I thought she was very nice and very thorough, but I did not remember her telling us that the costs would be that much.” Borrowers lack of familiarity with the mortgage process contributed to this feeling. One couple noted: “We have never had a loan and I guess there are some things we just didn’t understand.”

As a general rule, the up-front costs of obtaining a reverse mortgage will be about five percent of the maximum reverse mortgage available. About two percent of this is the lender’s loan origination fee and another two percent is the upfront mortgage insurance payment. On a $200,000 reverse mortgage, the origination fee will be around $4,000 and total charges will be arounf $10,000. Although these costs can generally be “financed” - i.e. paid from the loan proceeds - they still seem high to many seniors.

As a result, some seniors instead opt for a standard home equity line of credit (HELOC) loan as a means to access home equity for living purposes. Since HELOCs can be set up for little or no closing costs, this may seem like a good solution. But in most cases, if the intent is to provide additional funds for living expenses in retirement, it’s not.

In this series of posts will explore specific reasons why this strategy isn’t sound and also explain why reverse mortgage costs that seem so high, really are not out of line.

Social tagging: HECM vs HELOC

A Few More Related Articles of Interest:

Use a HELOC to Step Into a Reverse Mortgage

A Few Innovative Alternatives to Reverse Mortgages

When a HELOC is the Better Choice

Reason 1: HELOC’s Require a Monthly Payment; Reverse Mortgages Don’t

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