It’s no secret that nobody likes to pay closing costs and fees. And when it comes to mortgages, you likely have several questions about what these costs and fees entail. What exactly are you paying for? What do all these various fees cover? And most of all, how much is it going to cost you?
Whether you’re considering a reverse mortgage, traditional mortgage, or any type of financial tool, it’s important to have a clear understanding of all the associated costs. From closing costs to lending fees and even applicable interest rates, you’ll want to know exactly how much money you’ll need to bring to the table.
In the case of a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, there are both upfront and ongoing costs that you’ll need to consider before you choose to tap into your home’s equity. Check out some of the costs you can expect to pay throughout the process of the loan.
Just like a traditional “forward” mortgage, a reverse mortgage will require you to pay one-time upfront costs at the beginning of the loan. However, since a reverse mortgage involves tapping into equity that is already in your home, you have the option to roll a majority of these costs into your loan. Should you opt to use loan proceeds to cover upfront costs, you will not need to pay them at closing. In this scenario, these costs will be subtracted from your total reverse mortgage loan proceeds.
The following are some of the one-time, upfront costs you can expect to incur with a reverse mortgage.
Reverse Mortgage Counseling
Before you can formally submit your application for a reverse mortgage, you’ll be required to meet with a third-party counselor approved by the US Department of Housing and Urban Development (HUD). This session, which is typically about an hour long, is designed to help you deepen your understanding of the reverse mortgage and get answers to any remaining questions you may have. While the counseling fee typically costs around $125, some agencies can waive the fee depending on your financial situation. You can learn more about reverse mortgage counseling here.
Loan Origination Fee
Reverse mortgage lenders charge a loan origination fee to cover the processing, underwriting, and closing of your loan, and a HECM is no exception. However, since a HECM is government-insured, these origination fees are capped. So how much can you expect this fee to be? The loan origination fee will equal either $2,500 or 2% of the first $200,000 of your home’s appraised value—whichever is greater—in addition to 1% of your home’s value above $200,000. Have a higher value home? Not to worry—the Federal Housing Administration (FHA) caps all HECM origination fees at $6,000.
Also, keep in mind that this fee can be discounted or even waived altogether depending on the program and the discretion of the lender. That’s why it’s important to compare lenders and loan details.
Before your loan goes to underwriting, an independent third-party appraiser will evaluate the value of your home and property. This appraised value is a key factor in determining how much you will qualify to receive in reverse mortgage proceeds. In addition to valuing your home, the appraiser is also responsible for ensuring there are no health and safety concerns relating to your home. If the appraiser uncovers property defects, your home may not meet HUD minimum property standards. In this case, you’ll need to make the necessary repairs, then have a follow-up inspection by the appraiser. While the fee charged for the appraisal varies from state to state, the average cost is around $575. If a follow-up inspection is needed, you can expect it to cost around $125. It’s important to note that since appraisals are conducted by an independent party, lenders do not have control over the outcome of the examination or the exact cost. In some instances, HUD may require a second appraisal as well.
Initial Mortgage Insurance Premium (MIP)
One of the major benefits of a HECM is that it comes with mortgage insurance, as required by HUD. This insurance is designed to protect you and your heirs, guaranteeing that you will not owe more than what your home is worth. It also ensures that you will receive loan payments as agreed upon by the terms of your loan. While mortgage insurance premiums are made on an ongoing basis, the initial premium is 2% of the property value due at the time of closing. This cost is standard across all lenders and HECM loans.
Ah, the inevitable closing costs—regardless of the type of loan you’re considering, you’ll likely need to set aside the funds to cover these fees. Closing costs can be highly variable, largely dependent on where you live, the requirements for your loan, and the value of your home. Some of the costs you can expect to pay at closing include recording fees, title insurance, and state mortgage taxes. Since the estimates for these costs tend to vary and change over time, you’ll want to consult a lender for the most accurate numbers.
Once you’ve secured your reverse mortgage loan, you will also be responsible for ongoing charges involved. These costs are added to your loan balance on a monthly basis. Since these costs are largely dependent on the amount of your loan balance and how long you keep your loan, the best way to minimize them is to borrow only as much as you need.
The following are some of the ongoing costs you can expect to incur with a reverse mortgage loan.
Let’s start with the most obvious ongoing cost associated with any mortgage—the interest. Just like a traditional “forward” mortgage, interest on a reverse mortgage is charged and is added to the loan balance. While a forward mortgage requires monthly interest and principal payments by the borrower until the loan is paid, the opposite occurs with a reverse mortgage. Much like its name suggests, a reverse mortgage allows the borrower to receive payments and does not require you to make interest or principal payments until the loan becomes due and payable. However, while no monthly mortgage payments are required on a reverse mortgage, you have the freedom to pay as little or as much as you want, as often as you’d like.
When it comes to reverse mortgage interest rates, you have two options—either a fixed rate or a variable rate. While a fixed-rate reverse mortgage comes with a steady interest rate, you are required to receive your loan proceeds in one lump sum, rather than monthly payouts. However, it’s worth noting that this lump sum is a reduced amount of the total available proceeds. Alternatively, an adjustable-rate mortgage comes with a fluctuating rate, subject to change either monthly or annually. With this option, you are eligible for several distribution methods, including lump sum, monthly payouts, and a line of credit. As such, an adjustable rate will require you to only pay interest on the amount of funds you’ve withdrawn.
While each of these options has benefits, it’s important to speak with your lender about which option may work best for your individual situation.
Another typical ongoing loan cost is a lender servicing fee. Typically $35 or less per month, this fee is paid to your lender to cover costs associated with issuing account statements, distributing funds, monitoring taxes and insurance, and providing other loan services.
At Longbridge Financial, we believe that great service doesn’t have to come with a fee. That’s why we do not charge our HECM borrowers servicing fees. Our goal is to give you great service—and peace of mind about your finances. What’s more, we give you 24/7/365 access to your account information via our online portal, including online statements. And we’re the only active lender and servicer with a mobile application for iOS and Android devices. Learn more about Longbridge’s servicing department here.
Annual Mortgage Insurance Premium (MIP)
As previously mentioned, your mortgage insurance covers certain assurances. While the initial mortgage insurance premium (MIP) is paid at the time of closing, you’ll also need to pay an annual mortgage insurance premium over the life of the loan equal to 0.5% of the outstanding mortgage balance. Mortgage insurance premium costs are added to your reverse mortgage loan balance monthly, which will accrue interest for the life of the loan.
Long-Term Property Costs
While monthly mortgage payments are optional* on a reverse mortgage, you are still required to pay for real estate taxes, homeowners insurance, and property maintenance. The cost of this upkeep varies, largely depending on where you live and the value of your home. That’s why upon application, FHA requires that you show proof of enough income to continue paying for these essential items. When it comes to homeownership, there is always something to be done, so it’s important to budget for these costs well in advance.
A powerful financial tool for homeowners age 62 and older, a reverse mortgage provides a supplemental source of income and monthly cash flow to use on what matters most. When it comes to considering a reverse mortgage for your financial situation, education is key. This includes learning everything you need to know to financially prepare for the typical fees and costs that come with it.
While these fees can certainly add up, some can be waived, negotiated, or paid directly through the loan proceeds, minimizing the impact of upfront, out-of-pocket expenses. Keep in mind that many of these costs and fees vary by the area in which you live as well as the lender. We invite you to check out our guide to selecting the right reverse mortgage lender for you.
At Longbridge Financial, we know that a reverse mortgage is a big financial decision. That’s why we’re committed to recommending the reverse mortgage program only after we make certain the program is right for you and meets your needs. You can rest assured that if we ever feel a reverse mortgage is not the best option for you, we will tell you so. Not all lenders make that pledge.
* Real estate taxes, homeowners insurance, and property maintenance required.