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What does reverse home mortgage cost

    IndianMoney.com Research Team | Wednesday, March 25,2009, 04:28 PM
 

1. Mortgage Insurance Premium (MIP)

This is paid to FHA. It is insurance that ensures that when you pass, the balance of the loan will never exceed the value of your home. The amount is fixed at 2% of the lending limit for your county.

2. Loan Origination Fee

This is the fee paid to the Mortgage Broker and loan officer that helps you obtain a reverse home mortgage. This is 2% of the lending limit for your county.

3. Other Closing Costs

These typically run approximately $2,600 and include the title policy, title insurance, appraisal, termite inspection, document preparation fees, courier, notary fees, flood certification, recording fees, and credit report.

Who repays the loan?

Let’s explore repayment of a conventional mortgage and compare this to how a reverse home mortgage is repaid. Conventional mortgage payments are made on a monthly basis. Depending on the loan type, these payments could be interest only, or a combination of principal and interest. These payments are amortized over a 30-year period and, in most cases, never paid off. The loan balance, depending on the loan type, will either stay the same, go down over time, or increase. When both borrowers pass away, with a conventional mortgage the beneficiaries sell the house and payoff the mortgage. The beneficiaries keep the remaining equity in the home.

With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore the remaining equity continues to grow (see example below). When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have six months (plus two three months extensions, if needed) to sell or refinance the home. Once the home is sold, the Reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity in the home.

Actual Example:

In April 2006, in Emeryville, California, a single, 78 year-old man applied and was approved for a reverse home mortgage. The home was appraised at $550,000 and the beginning loan balance after close of escrow was $244,192. Equity at the start of the loan is was $305,808. After 5 years, based on a calculated 8% appreciation, the home will be worth $808,130 and the loan balance will be $346,275 (assuming 6.27% interest rate). So the remaining equity after 5 years would be $461,856.

This example shows that with a reverse home mortgage a senior is able to receive the debt relief or monthly payments he or she needs while the beneficiaries are secure in knowing the home equity is growing. It is a win-win situation for all involved.

With a reverse home mortgage, no payments are made during the life of the borrower(s). Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas where appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore the remaining equity continues to grow (see example below). When the last borrower passes, or it is decided to sell the home and move, the loan becomes due. The ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have six months (plus two three months extensions, if needed) to sell or refinance the home. Once the home is sold, the Reverse home mortgage lender is paid off and the beneficiaries keep the remaining equity in the home.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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