Reverse Mortgage Pros and Cons: If you or someone you know is considering a this special type of home equity loan and want to make sure you look before you leap then here are several very important things to consider to insure you know the truth about reverse mortgages.
What you will pay
Besides interest, getting a reverse mortgage typically involves four types of fees:
- An origination fee
- Third-party closing costs
- Mortgage insurance premiums
- A monthly servicing fee
You can generally finance these costs as part of your loan by having them deducted from the loan proceeds. A useful reference for comparing the cost—including interest—of different reverse mortgage programs is the Total Annual Loan Cost (TALC), which expresses all of the loan’s various costs as an annual percentage. This formula serves a purpose similar to that of the Annual Percentage Rate (APR) that’s often used to compare forward mortgages.
There is also a fee for the required HUD counseling service, which is not included in the TALC estimate. This fee is paid up-front to the counseling agency and cannot be financed as part of the loan. Depending on the type of reverse mortgage you get, you may also have a choice of having the lender pay the fee or paying it as part of the loan proceeds.
Choosing your payment plan
Reverse mortgages are available with fixed-rate and variable-rate options. How you receive funds from your reverse mortgage depends on which rate option you select:
- A fixed-rate reverse mortgage disburses funds in a lump sum to cover large expenses, such as paying off an existing mortgage or other debts.
- A variable-rate reverse mortgage offers access to the highest allowed amount of equity, offers choices for an immediate advance of funds, and provides several disbursement options:
- Monthly installments to supplement income for a predetermined period
- As a line of credit to draw on as necessary
- In a lump sum to meet large or immediate needs
- A combination of these options
- Borrowers can change their disbursement plans as many times as they wish.
Choosing your loan type
Whether you select a reverse mortgages with a fixed or variable interest rate depends on your disbursement preferences, as well as your sensitivity to interest-rate fluctuations:
- A fixed-rate offers the stability and security of a consistent interest rate that isn’t subject to market fluctuations, but provides limited disbursement options.
- A variable-rate provides flexibility in choosing rate adjustments and pay-out options
You can select a variable-rate option that adjusts on an annual or monthly basis.
- Annual rate adjustments are usually capped at two points per year and five points over the life of the loan. On the other hand, they provide a lower maximum loan amount.
- Monthly rate adjustments feature a larger maximum loan amount, but they usually have no annual adjustment cap, and instead are capped at ten points over the life of the loan.
An easy way to get great information is to have a Wells Fargo Reverse Mortgage Specialist talk with you over the phone. You an request to be contacted by completing this easy online form.
