Reverse mortgages have become an increasingly popular financial tool for seniors looking to access their home equity while continuing to live in their homes. While most people are familiar with the government-insured Home Equity Conversion Mortgage (HECM), there is another type of reverse mortgage known as the proprietary reverse mortgage. Proprietary reverse mortgages are private loans offered by financial institutions and are not insured by the Federal Housing Administration (FHA). In this blog, we will delve into the details of proprietary reverse mortgages and explore the closing costs associated with these unique financial products.
- Understanding Proprietary Reverse Mortgages:
Before we dive into the closing costs, let’s briefly understand proprietary reverse mortgages. Unlike HECMs, which have federally mandated guidelines and loan limits, proprietary reverse mortgages are custom-made products offered by private lenders. These loans are generally designed for homeowners with high-value properties and aim to provide access to a larger portion of the home’s equity compared to traditional HECMs.
- Common Closing Costs for Proprietary Reverse Mortgages:
Closing costs encompass fees and expenses that borrowers must pay when finalizing a mortgage loan. Just like traditional mortgages, proprietary reverse mortgages also come with closing costs. Here are some common closing costs associated with proprietary reverse mortgages:
a. Loan Origination Fee: This fee covers the lender’s administrative costs for processing the loan application. It is typically a percentage of the loan amount.
b. Appraisal Fee: Lenders require an appraisal to determine the market value of the property, which influences the maximum loan amount the borrower can receive.
c. Title Insurance: This insurance protects both the borrower and the lender from any potential issues with the property’s title.
d. Recording Fees: These fees cover the cost of recording the mortgage documents with the county or local government.
e. Credit Report Fee: Lenders may charge a fee to obtain the borrower’s credit report as part of the loan approval process.
f. Counseling Fee: Before getting a proprietary reverse mortgage, borrowers must attend a counseling session with a HUD-approved counselor. The counseling fee covers the cost of this session.
g. Escrow Fees: Proprietary reverse mortgages may require an escrow account to cover property taxes and insurance. Escrow fees may apply to set up and maintain this account.
h. Underwriting Fee: This fee covers the cost of evaluating the borrower’s financial information and determining their eligibility for the loan.
- Variances in Closing Costs:
One essential aspect to note about proprietary reverse mortgages is that the closing costs can vary significantly between lenders. Unlike HECMs, which have standardized costs regulated by the FHA, proprietary reverse mortgage lenders have more flexibility in setting their fees. As a result, borrowers should shop around and compare offers from different lenders to find the most favorable terms.
- No-Closing-Cost Options:
Some proprietary reverse mortgage lenders may offer “no-closing-cost” options, where they cover some or all of the closing costs in exchange for a higher interest rate on the loan. This can be an appealing option for seniors who prefer to avoid upfront expenses.
- Importance of Transparency and Disclosure:
As with any financial transaction, transparency is crucial when dealing with proprietary reverse mortgages. Borrowers should request a detailed breakdown of all closing costs and have a clear understanding of what each fee covers. Reputable lenders will be upfront about the costs and will provide the necessary information to help borrowers make informed decisions.
Proprietary reverse mortgages offer a unique financial solution for eligible homeowners with high-value properties. While these loans can be beneficial in providing access to significant home equity, borrowers must be aware of the closing costs associated with these financial products. Understanding the various fees involved and seeking transparency from lenders are essential steps in making an informed decision. By doing so, seniors can confidently navigate the world of proprietary reverse mortgages and determine if this type of loan aligns with their long-term financial goals and aspirations for retirement.