Understanding Reverse Mortgage Costs and Fees
A reverse mortgage is a type of home equity loan for senior homeowners aged 62 and older. Instead of making monthly payments as you would with a traditional “forward” mortgage, your lender makes payments to you — either monthly or in a lump sum.
The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is backed by the Federal Housing Administration. While these loans don’t have to be repaid until the homeowner moves or sells their home, or upon the homeowner’s death, there are reverse mortgage costs to consider.
In this article, we’ll cover:
- Common reverse mortgage costs
- How reverse mortgage costs affect your loan
- Finance your reverse mortgage costs or pay out of pocket?
- How to cover your ongoing expenses
Common reverse mortgage costs
A reverse mortgage has both upfront and ongoing costs that you’ll need to factor in before you decide to borrow against your home equity in this way.
|Upfront costs||Dollar amount||Ongoing costs||Dollar amount|
|Lender fees||Up to $6,000||Interest payments||Varies|
|Closing costs||Varies||Homeowners insurance||Varies|
|HECM counseling||$125 or more||Property taxes||Varies|
|Upfront mortgage insurance||2% of your home’s value||Annual mortgage insurance||0.5% of outstanding loan balance|
- Lender fees. Reverse mortgages come with origination fees, which compensate the lender for originating the loan. You’ll pay a fee that’s equal to either $2,500 or 2% of the first $200,000 of your home’s appraised value — whichever is greater — plus 1% of your home’s value above $200,000. The FHA caps origination fees at $6,000 for HECMs.
- Closing costs. There will be fees for an appraisal, title search and inspection. Additional smaller charges may include a credit check, escrow services, survey and, potentially, flood certification fee and pest inspection. You may be able to save on these costs by shopping around.
- HECM counseling. You’re required to participate in a reverse mortgage counseling session with a nonprofit housing counseling agency approved by the U.S. Department of Housing and Urban Development. The counseling fee is typically $125, but may cost more. Depending on your financial circumstances, the counseling fee may be waived.
- Upfront mortgage insurance. The FHA charges an upfront mortgage insurance premium, which is 2% of your home’s value. For example, if your home is worth $400,000, would your upfront MIP would cost $8,000.
- Interest payments. Your loan balances grows — rather than shrinks — with a reverse mortgage, and there will be interest charges. The more you borrow against your equity, the more you’ll pay in interest. This is likely more of a concern for your estate and heirs, but it’s still one of the reverse mortgage costs worth considering.
- Annual mortgage insurance. HECMs also have annual mortgage insurance premiums. The fee is equal to 0.5% of the outstanding loan amount. Since your reverse mortgage balance will grow overtime, you can expect your annual MIP amount to increase as well.
- Property taxes. You’re still responsible for your annual property taxes. This amount varies depending on where you live and your home’s value.
- Homeowners insurance. You’ll also need to maintain homeowners insurance coverage and flood insurance, if applicable. Your homeowners insurance premium will vary depending on your location, the condition of your home and other factors.
A quick note about taxes and insurance: If you fail to pay these bills as they come due each year, you run the risk of reverse mortgage foreclosure.
How reverse mortgage costs affect your loan
Taking out a reverse mortgage involves many costs, and the fees can add up to thousands of dollars.
Additionally, if you have an adjustable interest rate, the rate can change monthly, which can rapidly hike your outstanding loan balance, along with your annual mortgage insurance premiums.
It’s also important to note that the amount of equity you’ll be able to borrow with a reverse mortgage depends on several factors, including:
- Appraised home value, sales price or HECM loan limit (currently $765,600 for 2020), whichever is lowest
- Current interest rates
- The age of the youngest borrower or eligible non-borrowing spouse
- The amount of equity you have, which should equal 50% or more
For an estimate of how much you might qualify to borrow, use a reverse mortgage calculator.
Finance your reverse mortgage costs or pay out of pocket?
Now that you’re aware of what reverse mortgage costs to expect, you’ll need to determine how you’ll pay for them — especially the upfront charges.
If you have enough of a cash cushion and won’t completely drain your available savings, you might consider paying the costs out of pocket. Otherwise, you can roll your upfront costs into your loan, though it would reduce the amount of money you’re able to borrow, according to the Consumer Financial Protection Bureau.
It will also cost you more in the long run because you’re adding those costs to your loan amount and being charged ongoing interest and mortgage insurance on them as well.
How to cover your ongoing expenses
One of the main benefits of a reverse mortgage is the flexibility you have in how your funds are disbursed. You can choose one of the following payment options, and use some of the funds to cover your ongoing reverse mortgage costs:
- Lump sum. You’ll receive money just once, and may receive less than the other options. However, you’ll enjoy a fixed interest rate, as this is the only payout option allowed if you don’t want an adjustable rate.
- Line of credit. You get a credit limit, similar to a credit card. You’ll only pay interest on the amount you borrow.
- Tenure. You get a fixed monthly income for the rest of your life — or until you move or sell.
- Term. You get a fixed monthly income for a set number of years. After that, the income stops.
Additionally, you can combine a line of credit with either a term or tenure option. Having a continuous income and/or access to a line of credit can help you stay current on taxes, insurance, maintenance and homeowners association fees.
Other ways to pay your ongoing costs include:
- Using a portion of your Social Security income.
- Setting aside money from a part-time job.
- Tapping your 401(k) or individual retirement account funds.
Be sure you fully understand the costs and fees associated with a reverse mortgage, as well as how borrowing against your equity will affect your estate planning goals.