What fees are associated with a reverse mortgage?
When you borrow a reverse mortgage, you can expect to pay various fees before and during the loan term. Here is a breakdown of the fees associated with reverse mortgages.
If you are applying for a reverse mortgage, you should consider the cost associated with this loan. Unlike a traditional mortgage, a reverse mortgage does not require borrowers to make monthly mortgage payments to the lender. However, you will still be required to pay certain fees associated with reverse mortgages.
When you take a reverse mortgage, you will be required to pay counseling fees, origination fees, reverse mortgage insurance premiums, home appraisal, and closing costs. Closing costs comprise various one-time payments that may include a credit report fee, document preparation, flood certification, pest inspection, survey, recording, and escrow.
How much will a reverse mortgage loan cost?
The cost of borrowing a reverse mortgage varies depending on the type of reverse mortgage you take and the lender you choose.
Generally, home equity conversion mortgages have the most fees but there are caps on the amount a lender can charge. On the other hand, proprietary mortgages may be more expensive than HECMs since the federal caps do not apply to private reverse mortgages. Single-purpose reverse mortgages are the least expensive reverse mortgages, and they are offered to middle-to-low-income households for specific purposes.
Reverse mortgage fees and closing costs explained
When getting a reverse mortgage, there are certain costs you will be required to pay at closing and during the reverse mortgage term. The amount of fees you pay may vary by lender and location.
Here is a breakdown of the fees you can expect to incur with a reverse mortgage:
Counseling costs ($125 to $200
Reverse mortgages have a huge impact on senior homeowners and their heirs. As a result, the US Department of Housing and Urban Development requires borrowers to participate in a counseling session with a HUD-approved counseling agency before receiving the loan.
Reverse mortgage counseling fees range from $125 to $200, and the fee must be paid out-of-pocket. HUD requires that this fee must be reasonable, and the counselor must explain these fees before counseling.
Mortgage counseling is designed to help homeowners understand reverse mortgages, know the upfront and ongoing fees associated with the loan, know what happens to the loan when they die, and ask any questions they may have. The counseling agency must also evaluate the homeowner’s ability to afford the reverse mortgage based on their income and debt obligations.
Appraisal fee ($300 to $600)
Before the lender can act on your reverse mortgage application, you will be required to work with an independent third-party appraiser to determine the value of your home. The appraised home value determines your borrowing limit.
The appraiser must take note of any repairs required to make the home habitable and ensure it meets HUD’s minimum property requirements. The appraisal fee may range from $300 to $600 depending on the property size, age, condition, and location.
Loan origination fee (Up to $6,000)
Similar to traditional mortgages, reverse mortgage lenders also charge a loan origination fee to process the loan. Typically, the loan origination fee is usually $2,500 or 2% of the first $200,000 of the home’s appraised value, and an additional 1% for any amount above $200,000.
If you are borrowing a HECM loan, the loan origination fee is capped at $6,000, and you can decide to pay this fee out-of-pocket or roll it into the loan. However, if you are applying for a proprietary reverse mortgage, the HUD cap on loan origination fee does not apply.
Reverse Mortgage Insurance Premiums
Reverse mortgage insurance is different from homeowner insurance, and it is charged when you take the federal-insured HECM reverse mortgage. Lenders charge an initial and an annual mortgage insurance premium, and this fee is paid to the Federal Housing Administration (FHA).
The initial mortgage insurance premium is charged at closing, and it equals 2% of the lesser of the home’s assessed value or the maximum lending limit. For 2023, the HECM lending limit is $1,089,300. For example, if your home’s market value is $400,000, the initial mortgage insurance premium will be $8,000.
Once the reverse mortgage is approved and funds disbursed, the lender will levy an additional 0.5% annual mortgage insurance premium based on the outstanding mortgage balance.
When you borrow a reverse mortgage, you will pay interest on the loan. However, this loan does not require borrowers to make interest payments until when the loan becomes due and payable. The loan interest is added to the reverse mortgage balance each year.
Reverse mortgages can have fixed or variable-rate interest rates. A fixed interest rate has a steady interest rate, and it remains fixed throughout the term of the loan. However, fixed interest rates require borrowers to receive loan proceeds in one lump sum, instead of flexible periodic payments. In contrast, a variable-rate loan has a fluctuating interest rate that is subject to change throughout the life of the loan.
Loan service fees
This is an ongoing cost that is paid to the lender to cover the cost of issuing account statements, monitoring taxes, making disbursements, and other administrative services. This service costs about $35 or less.
At closing, you will be required to pay several one-time reverse mortgage fees, some of which are paid to third parties. You can decide to pay these fees with cash at closing, or with reverse mortgage loan proceeds.
Some of the closing costs you can expect to pay include:
Document preparation- this fee is paid to a third-party service that is responsible for preparing the final closing documents that comprise the note, deed, and trust agreement.
Credit report- The mortgage company is required to provide a full credit report from the three credit rating agencies to determine your credit history and any history of delinquencies.
Pest inspection-Though not mandatory, the lender may require a pest inspection to be done to make sure the property is free of insects.
Recording fee- when the reverse mortgage is completed, the security instruments must be recorded at government offices to update the records.
Title insurance- this insurance is required by the lender to ensure they are protected from any property disputes that may arise in the future.
Flood certification-this certification is required to determine whether the property is in a flood zone. It is required for all loans, even if the area is not flood-prone.
Survey- If there are property line disputes, a surveyor will evaluate the property boundaries to determine if the boundaries are clear.