The three major closing costs are the FHA mortgage insurance, the origination fee, and title fees.
FHA Mortgage Insurance
For the Home Equity Conversion Mortgage (“HECM”) product, the upfront FHA insurancemortgage premium is either 0.5% or 2.5% of the property value up to the HUD property value limit of $636,150, depending if the draw taken in the first 12 months (including closing costs and existing moretage debt or other debt that must be paid off at closing) is respectively at or below 60% or above 60% of the Initial Principal Limit.
Say your home is worth $300,000 and you obtain a HECM for $175,000. If your financed closing costs and payoffs and the first 12 months of other draws exceed 60% of $175,000, you will incur an FHA upfront insurance mortgage premium of 2.5% of the value of the home (in our example$300,000) of $7,500. If you do not exceed the 60% limit, the upfront mortgage premium would be $1,500 in our example.
It is important to realize that the FHA insurance provides three guarantees:
- The homeowner cannot “outlive” the HECM.
- The homeowner and heirswill not be personally liable if the balance of the loan exceeds the value of the home at the time of sale.
- The FHA will take over the loan if the lender becomes financially troubled
The origination fee is part of what the lender earns on the loan. The FHA has the formula to calculate what the lender can charge.
- 2% of the first $200,000 of current appraised property value and 1% of the remaining balance of current appraised property value, or
- A maximum of $6,000.
Many times there is no origination fee as the interest rate charged is sufficient to compensate the lender for costs of origination.
Title insurance policies assure the homeowner’s legal ownership of the property and is required for all mortgages whether reverse or forward. The largest part of title fees is the title insurance premium.
The appraisal establishes the legal value of the home. A HECM appraisal must be completed by an FHA-approved appraiser and follow FHA guidelines that can sometimes require more documentation than a typical appraisal. A typical FHA appraisal costs $475-$550 depending on the location. Remote locations, such as rural areas, and properties with unique circumstances will cost more.
Other Closing costs
Other closing costs include counseling, wire fees, flood cert, and credit reports. With the exception of the higher upfront mortgage fees for total first year draws in excess of 60% of the loan amount (or Principal Limit) all other closing costs are those typical of a regular mortgage.
Ongoing annual costs are the mortgage interest on the HECM and the annual FHA mortgage insurance premium accrued on the loan of 1.25%, charged on the outstanding balance of the loan. And of course, as with any mortgage, the borrower must pay the taxes and related insurance on the home used as collateral on the loan.
Would you like to learn more?
The “Knowledge Base” has the answers to over 300+ questions you may have on the HECM product.
If you would like to know how much you potentially qualify for, and whether you possibly have adequate monthly cash flow, go to the HECM WIZARD and input your information.
If you would like to reach out and talk with me, fill out the information on Contact Me or email at st.john.bannon@JMCapGroup.com