I just did a hypothetical reverse mortgage calculation using this calculator. For the calculation I used a birthdate for the husband of January 1, 1945 and June 25, 1945 for the wife. I also assumed the house was worth $200,000 and that there were no other loans on the property. Here’s the quote I got:
This note was attached to the bottom of the results:
These estimates are based on current HECM interest rates, maximum origination and servicing fees, and an approximate national average closing cost total. Interest rates are current for the week of February 12th. Actual loan amounts available depend on the rates in effect when a loan is closed, and the actual origination fee and closing costs charged. They also depend on the appraised value of your home and current equity limits in each program. These estimates reflect Fannie Mae’s current equity limit and the HUD equity limits as of February 10, which are subject to change during the year.
About two-thirds of the way down you’ll see the breakdown of the fees. According to these numbers, the fees would run you over $16,341 or 8.1% of the value of the house, which seems to be high compared to the 6% – 7% range I have been reading about in various articles. I’m also not quite sure why they must charge for mortgage insurance since the homeowner is not allowed to borrow anywhere close to the 80% mark that usually determines the need for private mortgage insurance on a standard mortgage. I’m also not sure why there has to be an additional “service fee set-aside” since the lender is already getting $4,000.
One thing to note is that if you decide to take a line of credit and don’t use it all, the balance grows. Take a look at this graphic to see what I mean:
So, if the couple in this example took out a reverse mortgage for $110,259 but didn’t touch it for 5 years, they would have over $135,000 available in 5 years.
I’m trying to be fair in my analysis but I have to say that the fees seem high to me. I’m not necessarily against using this product but I think I would reserve my use for emergencies or as a last resort. I certainly wouldn’t use it to take a vacation. That just doesn’t seem prudent to me.