I received a note recently from someone who was outraged at what he considered to be the shark-like and perhaps illegal fees connected with reverse mortgages.
The man's elderly friend had obtained a reverse mortgage that included fees and closing costs totaling almost $11,000. That was on top of a monthly loan-servicing fee of $35 on the $700-a-month payment.
This loan stinks," the reader wrote. "Elderly people may only see that they are getting a monthly check, but not be aware of the hidden fees."
I understand why the man was shocked by the cost of a reverse mortgage, but the fees his friend was being charged weren't hidden or illegal. Nonetheless, he was right to be worried about the high cost of this specialty mortgage.
To review the basics, a reverse mortgage is available only to homeowners 62 or older. This type of loan allows seniors to convert equity in their home into tax-free cash, without selling or giving up title.
Borrowers can take the loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination. The loan size depends on the borrower's age and other factors, and the loan doesn't have to be repaid until the borrower moves out of the house or dies.
The most widely available reverse mortgage is the Home Equity Conversion Mortgage (HECM), which was created by the U.S. Department of Housing and Urban Development and is insured through the Federal Housing Administration (FHA), which is part of HUD. For more information about an HECM, go to AARP's very useful Web page on this topic at www.aarp.org/revmort, or call 888-687-2277 to order a free copy of "Home Made Money: A Consumer's Guide to Reverse Mortgages."
Fannie Mae, the nation's largest purchaser of home mortgages, offers a reverse mortgage called Home Keeper. For more information about this product, call 800-732-6643.
Financial Freedom Senior Funding Corp. of Irvine, Calif., a subsidiary of Lehman Brothers Bank, offers a reverse mortgage called the Cash Account Plan. Since this reverse mortgage has virtually no maximum home value or loan limit, it is best for seniors with high-priced houses. Call 888-738-3773 for more information.
The HECM and Home Keeper products are available in every state, while Financial Freedom's product is offered in 31 states -- including Maryland and Virginia -- and the District of Columbia.
When it comes to an HECM, the interest rate isn't going to vary much from lender to lender, said Ken Scholen, director of the AARP Foundation's reverse mortgage education project.
"So you should focus on the fees," Scholen said.
And what are those fees? Here's what you can expect:
• An appraisal fee. You will need to get an appraisal so the lender can determine how much your house is worth. Appraisal fees generally range from $300 to $400, according to the National Reverse Mortgage Lenders Association.
• An origination fee. This fee is for preparing and processing your loan. Under the HECM program, this fee is limited to 2 percent of your home's value or 2 percent of the FHA loan limit for your area, whichever is less. Lenders have the right to charge you a minimum $2,000. If your home is valued at $200,000, the origination fee could be as high as $4,000 (the 2 percent maximum). Some lenders do charge less than the maximum (bless their profit-making hearts). So, Scholen said, you may be able to negotiate with the lender over this particular fee.
• Mortgage Insurance Premium. Insurance for a reverse mortgage benefits both the lender and the borrower. It pledges that a borrower will receive all payments due as long as he or she lives in the home regardless of what happens to the home's value. It also insures that the lender will receive full repayment of a loan balance. The premium for a reverse mortgage cannot be more than 2 percent of your home's value (or 2 percent of the FHA maximum loan amount for your area, whichever is less). There is also an annual insurance premium of no more than 0.5 percent added to the interest rate charged on the loan.
• Closing costs. There is a dizzying array of closing costs not unlike those charged for regular mortgages. "In the greater Washington area on a $200,000 home, for example, this total may range from about $2,000 to $3,000," Scholen said. He added: "The smart thing to do is ask each lender for the total of all the third-party closing costs in writing and then compare these totals." That way you can see if a lender is charging an inflated fee for any particular item, Scholen said.
• A servicing fee. This is the fee the lender charges for sending you a bill, account statements, making any changes in your loan advances, etc. FHA limits the servicing fee to $30 per month if your loan has an annually adjustable interest rate, and to $35 if the interest rate is adjusted monthly. Again, those are the maximum fees allowed. The servicing fee can vary from lender to lender.
It's understandable that most people aren't familiar with standard fees for a reverse mortgage. To get an estimate of the fees you may be charged, try the reverse mortgage calculator at the National Reverse Mortgage Lenders Association's Web site (www.reversemortgage.org).
But don't just get mad when you see the fees. Get even by shopping around for the best deal.
