We often get asked what the closing costs for a reverse mortgage are. We will be going over five different things to consider when looking into the closing costs with a reverse mortgage.
Feel free to watch the video below or read the transcribed text below. If you're interested in learning more, you can request a free book here or reach out to your local reverse mortgage planner.
Harlan Accola from Fairway Independent Mortgage Corporation. One of the biggest criticisms of reverse mortgages is that they're expensive, that there's a lot of fees and costs involved. And quite frankly, reverse mortgages are more costly than traditional regular mortgages. But are they expensive compared to what? For example, there are costs in selling a home, sometimes 6%, 7%, or more to be able to sell a home instead of keeping a home. There are costs to professionally manage mutual funds or annuities or other types of investments. And what about the costs of making payments for 10, 15, 20 years into retirement when that's money that could be used for something else? With a reverse mortgage loan, mortgage payments are not required. However, payment of property taxes, insurance, and maintenance are required. And maybe most importantly, what about all the memories, and the fun things that can be done with family and friends and visiting grandchildren, and going on vacations, which otherwise could not be done without the use of the home equity?
You know, it's a universal rule that you have to give up something to get something better. So it is true that you have to give up a certain amount of equity to get a certain amount of cash, just like you have to take money out of an investment or out of your savings account. So let's take a look at five different things that we should consider as we are concerned about the costs. Everyone wants to get their money's worth, and we feel that a reverse mortgage is a great value and there's a lot of benefits that you get for a little bit of cost.
First of all, maybe reverse mortgages cost more because they're worth more. Think about it. You'd never have to make a payment ever for the rest of your life no matter what, as long as all loan terms are complied with, including paying your taxes, insurance, and maintenance of the home. You will never have to worry about the mortgage exceeding the value of the home, no matter what, because of the protection of FHA mortgage insurance. And the fact is it's a non-recourse law, it cannot be canceled, and is only owed by the house, not by you and not by your heirs. That is a benefit that you cannot find with any other mortgage.
Secondly, closing costs are paid with equity, not with cash. Now that's a big deal because when you think about it, you don't have to pull money out of your wages, your social security, or any other source of income. You don't have to remove the money out of your investments. All of the costs, interest, closing costs, everything to do with a reverse mortgage, is paid with future equity. It's equity that you may never even have in the future that's guaranteed by the FHA mortgage insurance premium. So it is not something that you have to come up with today. You never write a check out of your checkbook for the reverse mortgages for today, that's something that is paid after you are gone and after the house is permanently sold.
Thirdly, we need to look at the fact that when you take money from a reverse mortgage, and there is a cost to get the money out, there's also a cost to taking money out of investments because once you take $1000 out of investment, it's not only the $1000, that's the goose that lays the golden eggs for years into the future. So you are going to lose all of the money in the investment plus what that investment is going to make over the next 5, 10, 15, 20 years*. Plus, if you're still making a payment, that is money now that has to continue to come out of your wages or your investments to fund that, so you would no longer have to do that with a reverse mortgage. And let's look at the things that money can't buy. Trips to see grandchildren, helping out a child, giving something to your church or charity. That's something that you can't put a stamp on and the actual value because it's something that you can contribute while you're in retirement without damaging the other plans that you have.
Number four, let's look at the facts of selling your home. That's not free, because if you sell your home, now, of course, you can't live there anymore. Now you're going to have to go rent or live with your children, which doesn't always work out that great, but if you want to sell your house, you're going to pay at least probably 6% to a realtor for the commission. And then, you have other closing costs as well, and usually, it only costs 2% to 4% of the value of your house to do a reverse mortgage, so it's quite a bit less expensive to stay in your house rather than sell it. So in comparison, sometimes it just makes more sense to stay right at home.
Last but not least is the equity in your home. You're not paying the costs that are involved with a reverse mortgage. Remember your house is, and there is probably going to be an increase in the value of your home throughout the next 5, 10, 15, 20 years*. So while the value of your house is going up, yes, your mortgage balance will also be going up. But the fact is, is that the increase in equity will probably pay all of the interest and all of the expenses associated with the reverse mortgage, not your investments, not your social security, not even your heirs. And if that doesn't happen and the value of the house goes down, you won't pay it, your heirs won't pay it. FHA mortgage insurance will pay for that, and you won't have to worry about that side of it even after you're gone.
So the bottom line is, when it comes to the costs involved with a reverse mortgage, while they may be more expensive than a regular mortgage, you get much more. And the fact is, quite frankly, when you're buying a car, when you're buying a piece of furniture or whatever it is, good things happen to cost a little bit more than things that are not as valuable. So when it comes to reverse mortgage let's focus on the benefits, and take a look at what you get rather than what you lose, because certainly, you have to give up a certain amount of equity, but on the other side of it you gain a lot of benefits.
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Harlan Accola Reverse Mortgage Director, NMLS#277693
*This blog is not financial advice. You should consult a financial expert about your specific situation.