Fixed Rate HECM: No Set Aside, No Monthly Servicing Fees
Michael Branson 3/17/10 5:48pm
What is the newest and best thing in reverse mortgages? Well, for the fixed rate product it is the lenders ability to offer No Monthly Servicing Fees on the fixed rate mortgages. Servicing fees historically ran $35 a month for the adjustable rate loans and $30 for the fixed rate when it was introduced. The costs have been slowly inching downward but the latest values of the fixed rate loans in the secondary market combined with the fact that the fixed rates must be a full draw at inception, make it possible for lenders to eliminate this cost entirely on the fixed rate product.
The servicing fee is a monthly charge that is assessed to service the loan. Since the reverse mortgage originally started as all adjustable rate loans and many times as very low balances when borrowers opted for the tenure or line of credit programs (meaning they took very little of their funds up front and accepted monthly payments or left their eligible funds in a line of credit which they could access at a later date), there was no interest on the loan to cover the cost of servicing the loan. Therefore, rather than increasing the interest rate on a fractionally drawn reverse mortgage by .25% - .375% (which would make no sense on a very small balance) the way a forward or traditional loan would on a fully drawn mortgage, the reverse mortgage utilized a monthly assessment to cover servicing costs.
Along with the knowledge that this servicing cost would be incurred, the program would require borrower to "set aside" a portion of the funds for which they were eligible to cover these charges in the future. These "Servicing Fee Set Asides" often ran into the thousands of dollars and represented money on which the borrowers were not paying interest, but were also not able to put into their pocket and use. This new Zero Cost Servicing Fee not only saves borrowers the $30 monthly charge that was prevalent on the fixed rate product for so long, but since there is no charge, there are no set-asides!
What this means for seniors is that they do not incur the additional monthly/yearly charges and the interest that accrues on those charges, and that the money that would normally be set aside to cover this obligation in the future is now available to the borrower. For many who are paying off existing mortgages, being able to obtain an additional $3,000 to $5,000 or more may mean the difference of being able to pay off the existing financing without having to come in with additional cash. Yes, if the borrower borrowers the funds there will be interest charged on the borrowed funds, but at least it is money the borrower can use. It may be funds the borrower can use to pay off an existing interest bearing mortgage or money that the borrower does not have to take out of their savings to close their new loan.
use a specific example to illustrate...
For a borrower born 1/1/1935 (75 years old) a Zero Servicing Cost reverse mortgage would save the $4,653.20 over what the borrower would have had to set aside with a servicing fee of $30.00. That gives this borrower almost $5,000 to use right now. Again, this is a big advantage to borrowers paying off existing financing and seeing that they are already short to close and this may be the difference it takes to allow then to eliminate their monthly mortgage payment.
Borrowers need to remember that all fixed rate reverse mortgages require a one-time distribution so that means that all funds must be taken at closing. For those borrowers who do not want all the funds a fixed rate can give them but like the idea of a fixed rate and a zero cost servicing fee, remember, there is never a prepayment penalty and you can prepay a portion of your reverse mortgage to limit the amount of interest you accrue. The downside to this is that once you take funds and repay them with a fixed rate reverse mortgage, you cannot re-borrower on that mortgage later. The fixed rate is a closed-end instrument and if you think you may want to borrower in increments, then the adjustable rate options are always still available...but there are currently no zero servicing fee loans available on the adjustable rate programs.
The bottom line is that the No Servicing Fee Fixed Rate Reverse Mortgage is an extremely positive move for borrowers looking at this financing. If you have been considering a fixed rate reverse mortgage, look at the service fee options and how much this can save you.
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