If you’re a homeowner over the age of 62, you have probably thought about reverse mortgages or at least wondered what one can do for you. Unlike traditional mortgages and home-equity loans, you don’t have to pay back the money you earn from a reverse mortgage. In fact, you don’t make any mortgage payments. Instead, you receive payments from the lender. With each payment, the amount you owe on your home increases.
Although there are no mortgage payments to make, borrowing money from San Diego reverse mortgage lenders is not free. Following are some costs associated with reverse mortgages:
- Closing Costs – As with traditional mortgages, reverse mortgages have several costs due at closing including title-search fees, inspection fees ad recording fees. In some cases, you can have the lender pay for closing costs, but it lessens the amount of money you stand to receive through a reverse mortgage.
- Interest Charges – Interest rates continue to accrue on the loan until the day it is paid in full. Several factors affect interest rates and are discussed later in this article.
- Monthly Servicing Fee – While there are no mortgage payments, you must pay a small fee each month – usually up to $35 per month – to the lender servicing your reverse mortgage.
- Reverse Mortgage Insurance – Homeowners must purchase reverse-mortgage insurance, which can cost up to 2 percent of the value of the home. It’s also common for one-half percent to be added to the interest rate and charged on the loan balance each month to cover reverse-mortgage insurance costs.
Of all the factors that can cost you money, interest charges are by far the most expensive. In addition to the current interest rate, many other factors can influence your rate. However, interest rates are not set according to your credit history or credit score as they are with traditional loans and mortgages. Instead, reverse-mortgage interest is determined by the following:
- Current Interest Rates – Most interest rates for reverse mortgages are adjustable and fluctuate along with rising and falling interest rates.
- Time – Generally, the interest rate paid in the beginning of a reverse mortgage is higher than that paid toward the end of the loan.
- Appreciation – The value of your home also determines your interest rate. As your loan balance nears an amount equal to the value of your home, you get a lower interest rate. If your home appreciates rapidly, your loan balance may always stay well under the value of your home, resulting in a higher interest rate.
Carefully weigh all costs associated with reverse mortgages before making a decision. Ask your lender to explain all costs if they are unclear.