In addition to understanding how the process of a reverse mortgage works, one of the most important aspects of the reverse mortgage lending process for a potential borrower to comprehend is that of costs and interest. By knowing what types of fees are associated with a reverse mortgage, you’ll be better equipped to determine if this is the right type of financing option for you.
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For starters, you’ll have a number of upfront fees that you will be responsible for paying at the time your reverse mortgage is written. These include loan closing costs, as well as lender fees and any upfront mortgage insurance required. The amount of your upfront costs will vary substantially based on a number of factors, including the amount of your loan, the lender you use and how much of the loan amount you take upfront. If you have an HECM loan (Home Equity Conversion Mortgage), which is regulated by the U.S. Department of Housing and Urban Development (HUD) and is insured by the Federal Housing Administration (FHA), costs will be more consistent among loans from different lenders. However, if you have a proprietary reverse mortgage, you may incur varying costs.

Some of the upfront costs you can expect to pay include:

  • Closing costs – These are the same types of fees you would incur if you were getting a traditional mortgage and the costs can vary widely by lender. Costs include things like appraisal fees, inspection fees and title insurance.
  • Origination fee – This is the fee that the lender charges for writing the loan.
  • Upfront mortgage insurance premium (MIP) – This cost will be determined based on how much of your initial principal limit you borrow within the first year of the loan. The initial principal limit is the amount of money you are authorized to borrow overall through your reverse mortgage, with the number being calculated based on the value of your home, the interest rate and your age. If you borrow less than 60% of that amount within the first year, the upfront MIP will be 0.5% of the appraised value of your home (up to $625,500). If you borrow more than 60% of this amount, the upfront MIP will be 2.5% of the appraised value of your home (up to $625,500).
  • Reverse mortgage counseling fee – This fee is not part of your actual loan, but is the fee incurred from the mandatory counseling required by a third-party agency. The fees are paid directly to the agency and are generally around $125, although low-income individuals can sometimes get this fee discounted or waived.

Ongoing costs that will be incurred over time:

Although you are not required to make payments on your loan except for property taxes, insurance and maintenance until you permanently vacate your home, there are ongoing costs that will accrue on your loan over time. These costs will add to the loan balance and will be compounded over time. Ongoing costs include:

  • Loan interest – Interest rates can either be fixed rate or adjustable, although fixed rate interest is generally only available on lump-sum payouts.  The higher the loan balance, the greater the interest charges. This means that the more money you take out and the more fees that are incorporated into the loan balance, the higher the interest charges will be.
  • Mortgage insurance – Aside from the upfront MIP, lenders add an additional 1.25% for mortgage insurance onto the interest rate on an ongoing basis.

The best way to limit the amount of your overall costs is to find a reverse mortgage with an attractive interest rate and to hold off on taking out money until you really need it. The sooner money is withdrawn from a reverse mortgage, the longer it will accrue interest. Additionally, you can lower your costs by paying for any upfront costs out of pocket rather than paying for them out of your loan balance. If they are paid from your loan balance, the amount of the costs will increase the outstanding loan balance and will accrue interest and mortgage insurance over time, which is compounded, adding substantially to the overall cost over the long term.

For more information on reverse mortgage rates and costs please call 1-800-827-1794.

This material is not from HUD or FHA and has not been approved by HUD or a government agency.

As with any loan there are risks associated with a reverse mortgage.  The right to remain in your home is contingent on complying with reverse mortgage loan terms and it is possible to lose your home if you do not comply with the terms of the reverse mortgage such as keeping current with property taxes, insurance and maintenance costs.