What does a reverse mortgage cost?

When applying for a reverse mortgage, you should consider all the fees associated with this loan.  While you won’t be required to make monthly mortgage payments, you will still pay certain costs at closing and during the loan term. Knowing the cost of a reverse mortgage can help you decide whether a reverse mortgage is a good option for you.

When you take a reverse mortgage, you will pay two categories of reverse mortgage costs i.e. upfront costs and ongoing expenses. Upfront costs are the fees you will pay at the beginning of the loan, and they include counseling fees, appraisal fees, origination fees, initial mortgage insurance premium, and closing costs. Ongoing costs are paid during the term of the loan, and they include loan interest, property taxes, annual mortgage insurance premiums, and service fees.

What is a reverse mortgage?

A reverse mortgage is a financial agreement that allows senior homeowners to borrow against the equity in their homes in exchange for a lump sum payment, a series of payments, a line of credit, or a combination of these options. Depending on the type of reverse mortgage you take, you may be allowed to use the money for any purpose or limited to a single purpose.

While reverse mortgages have a similar concept to a home equity loan, the former does not require homeowners to start making mortgage payments immediately. The amount you owe on the reverse mortgage grows over time, and you won't be required to make payments until when you move out of the home, sell or transfer the home, or die.

What are upfront reverse mortgage fees?

Similar to a traditional mortgage, a reverse mortgage requires borrowers to pay certain upfront costs at the beginning of the loan. You can pay these costs out of pocket, or roll these costs into the reverse mortgage, and the fees will be deducted from the loan proceeds at closing.

Here are some of the upfront costs you should expect to pay:

Origination fee

Lenders charge a loan origination fee to underwrite and close the loan. The Federal Housing Administration (FHA) uses a formula to guide how much origination fees lenders can charge. 

The FHA formula is as follows:

2% of the first $200,000 of the property value and 1% of the amount above $200,000.

With Home Equity Conversion Mortgages (HECMs), you can expect to pay the greater of $2,500 or 2% of the first $200,000 of your property value. If your home is valued above $200,000, the maximum fee you can pay is $6,000. Some lenders can waive or discount these fees depending on the type of reverse mortgage you are borrowing.

Counseling fee

Before the lender can formally review your reverse mortgage application, you must have completed a HUD-approved counseling session with a third-party counselor. The counseling fee is about $125, and it is paid to the counseling agency. During the counseling session, you should expect to talk about the reverse mortgage application process, the benefits and drawbacks of reverse mortgages, and eligibility requirements.

Appraisal fee

An appraisal is required to determine the actual value of your home. If you are applying for an FHA-insured reverse mortgage, the appraiser is required to follow specific FHA-provided guidelines (PDF) to calculate the value of your property. The appraisal fee varies across states, and you can expect to pay anywhere from $300 to $500 on average. If a second appraisal is needed, you will pay an extra $125.

The appraised home value determines how much you qualify to receive in reverse mortgage loan proceeds. Apart from determining the home's value, an appraiser also ensures that the home meets HUD's health and safety standards. If the property is in disrepair or has defects, you will be required to make the necessary repairs to qualify for a reverse mortgage. The lender will order a second appraisal to determine if the repairs meet the required standards.

Initial Mortgage insurance premium

If you are getting a HUD-insured reverse mortgage, you will pay an initial mortgage insurance premium (MIP) at closing. This insurance ensures that you won’t pay more than your home is worth. The initial MIP is 2% of the home value at closing. You will also pay an ongoing MIP during the loan term.

Closing cost fees

Most loans charge closing costs at closing, and reverse mortgages are not an exemption. Some of the closing costs you will owe include title insurance, credit checks, attorney fees, surveys, recording fees, document preparations, state mortgage taxes, etc. Closing costs can be anywhere from 2% to 5% of the loan amount, but they can vary depending on where you live, the value of your home, and the loan requirements. 

What are the ongoing costs of a reverse mortgage?

Once you have been approved for a reverse mortgage and received a disbursement, you will be responsible for paying certain ongoing costs. You may be required to pay these costs out-of-pocket or they will be added to your loan balance.

Here are some of the ongoing costs you may incur:

Interest

The interest charged on a reverse mortgage is added to the loan balance every month since you are not required to make mortgage payments until when the loan is due and payable. The interest rate can be either fixed-rate or variable rate.

A fixed-rate reverse mortgage comes with a constant interest rate, and you will be required to take a lump sum payment instead of periodic payments. On the other hand, a variable-rate reverse mortgage has a fluctuating interest rate can changes either monthly or yearly; you can take distributions as a lump sum payment, monthly installments, or a line of credit. Generally, you will only pay interest on the payments you receive.

Property costs

When you apply for a reverse mortgage, you must show proof of income to prove that you will be able to continue paying upkeep costs such as property taxes, homeowner insurance, and property maintenance. The total property costs you pay depend on where you live and the value of your home.

Ongoing mortgage insurance premiums

Apart from the initial mortgage insurance premium, you will be required to pay an annual mortgage insurance premium. The annual rate is 0.5% of the annual mortgage balance. This insurance ensures that you will continue to receive monthly mortgage installments.

Loan service fees

Lenders charge a monthly service fee to cover costs associated with distributing mortgage payments, mortgage statements, and other loan services. Typically, the service fee is $30 if you have a fixed interest rate or a variable interest rate that adjusts annually, or $35 if your loan interest rate adjusts monthly.

Conclusion

When you take a reverse mortgage, you will be required to pay certain costs related to your home or the reverse mortgage. The fees can be paid either upfront including a loan origination fee, mortgage insurance premium, and closing costs, or as ongoing costs such as interest, property taxes, and service fees.