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Why are reverse mortgages so expensive and why do they charge PMI insurance?
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| By
Elleniac |
Posted on
08/13/06 Total Answers
2 |
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| Answers- |
| Because in practical terms it is a very long term commitment on the lender's part, and because they are taking a big risk of you outliving your money. The risk, and therefore the rates, are commensurately higher, and they want PMI in case your home doesn't sell for enough money to pay them off thirty or forty years down the line (which is not really a issue unless property values start doing something unprecedented).
With regular mortgages, people refinance every couple of years. That's not really an option with RAMs, which means you've got to get it right the first time. The FHA RAM has about the best consumer protection you can get.
Nonetheles, the RAM is not, in general, a good idea if you can avoid it. In most cases, it is better to sell and downsize, and invest any net proceeds. The chances of your heirs keeping the family home after you are gone is pretty minimal anyway if you do a RAM. |
| Answer by :
Searchlight Crusade On Date
2006-08-14 04:34:42 |
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| Elleniac,
There are a lot of fees disclosed for reverse mortgages but if you look at them a little closer they really aren't that bad.
First since FHA reverse mortgages are insured by FHA you must pay the PMI. The reason for this is simple. The mortgage insurance guarantees the lender that they are going to get a return on their money that they are loaning you. From the borrower's perspective it is a good thing because it protects you in two ways. If the lender goes bankrupt, FHA makes sure that your loan is placed with another lender under the same terms. If this wasn't in place and the lender went bankrupt someone could knock on your door one day and ask for you to pay up. Second, if for some reason your home value depreciates greatly in value and you owe more on the loan than the home is worth, when the time comes to sell your home you are not responsible for the difference. For example, if you owe $100k on the loan and your home depreciated to $80k you would not be responsible for the $20k difference.
Second, the origination fee or what the mortgage company charges is a mandated 2% of the home value or $2000 whichever is higher. On average most companies get around 3% on purchases, refinances, home equity loans etc. Also loan officers on typical loans get paid more on the "back end" of the loan from the lender if they get you into a higher interest rate. So some loan officers can make up to 5% on an conventional loan. To protect seniors FHA has mandated 2% is the max mortgage companies can make and I feel this is a major reason why most companies don't deal with reverse mortgages.
Third, the normal closing costs to do the loan are usually disclosed in the beginning. These costs include the appraisal fee, title work, flood certs etc. Companies out there that offer no closing costs conventional loans still have to pay all of these fees. The way they do this is giving you a higher interest rate so that they actually make more money off of you if you paid all the closing cost upfront or roll them into the loan. In order for seniors to receive the absolute lowest interest rate they can for reverse mortgages the fees are paid out of the loan instead of just raising the interest rates.
So, as you can see, once you know how most conventional lenders make most of their money by giving you a higher interest rate, the fees involved in doing a reverse mortgage are not that bad and you are insured you are getting the best possible rate out there.
If you would like more information please feel free to contact me. Reverse mortgages are all I specialize in and I would be glad to send you more information.
bburns@griffinloans.com |
| Answer by :
bburns31 On Date
2006-08-16 21:04:48 |
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