Reverse mortgages have become increasingly popular among seniors as a viable financial tool to unlock their home equity and supplement their retirement income. The Home Equity Conversion Mortgage (HECM) backed by the Federal Housing Administration (FHA) is the most common type of reverse mortgage. However, there is another option known as proprietary reverse mortgages, offered by private lenders. In this blog, we will explore the key differences between standard HECMs and proprietary reverse mortgages, with a specific focus on their closing costs.
Understanding HECMs and Proprietary Reverse Mortgages
- What is a Standard HECM?
The Home Equity Conversion Mortgage (HECM) is a government-insured reverse mortgage designed to assist homeowners aged 62 and above. It offers various payment options, including a lump sum, line of credit, monthly payments, or a combination of these.
- What are Proprietary Reverse Mortgages?
Private lenders offer proprietary reverse mortgages, also known as jumbo or private reverse mortgages. These loans typically cater to high-value homes and may have different terms and conditions when compared to HECMs.
Comparing Closing Costs: HECMs vs. Proprietary Reverse Mortgages
- HECM Closing Costs
HECMs typically have standardized closing costs regulated by the FHA. These costs usually include an origination fee, appraisal fee, mortgage insurance premium (MIP), title insurance, and other third-party fees.
- Proprietary Reverse Mortgage Closing Costs
Since proprietary reverse mortgages are not government-insured, lenders have more flexibility in setting their terms and fees. As a result, closing costs can vary significantly among lenders. Common fees include origination fees, appraisals, title insurance, and servicing fees.
Factors Influencing Closing Costs
- Loan Amount and Home Value
The size of the loan and the appraised value of the home can impact closing costs. Higher loan amounts or more valuable properties may incur higher fees.
- Lender Policy
Each lender can set its own policies and fee structures for proprietary reverse mortgages. Some lenders might offer competitive rates, while others may charge higher fees to cover the risk associated with larger loans.
When considering a reverse mortgage, it is essential to examine the closing costs associated with both standard HECMs and proprietary reverse mortgages. While proprietary reverse mortgages can offer higher loan limits and more flexibility, they may also come with higher closing costs. Weighing the pros and cons and seeking professional advice will help you make an informed decision that aligns with your financial goals and provides you with a secure and comfortable retirement. Remember that understanding the closing costs is just one part of the larger picture when choosing a reverse mortgage that suits your specific needs and preferences.