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Understanding Reverse Mortgage Costs and Fees
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A reverse mortgage is a home equity loan for homeowners aged 62 and older. Your lender makes payments to you — either monthly or in a lump sum — instead of you paying them. Before applying for this type of loan, however, it’s important to understand the reverse mortgage costs you’ll pay, which can add up to thousands of dollars.
Common reverse mortgage costs
|Reverse mortgage costs||Dollar amount|
|HECM counseling||$125 or more|
|Origination fees||Up to $6,000|
|Upfront mortgage insurance||2% of your home’s value|
|Annual mortgage insurance||0.5% of your loan balance|
Home equity conversion mortgages (HECMs) are the most common type of reverse mortgage. The Federal Housing Administration (FHA) insures HECMs and they have several costs that you’ll need to factor in before you decide to borrow against your home equity.
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 (HUD). The counseling fee is typically $125, but may cost more. Depending on your financial circumstances, the counseling fee may be waived.
Reverse mortgages come with origination fees, which compensate the lender for processing 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 HECM loans.
There will be fees for a home appraisal, home inspection and title search. Additional smaller charges may include a credit check, escrow services, survey and, potentially, flood certification and pest inspection fees. You may be able to save on these costs by shopping around.
Borrowing a reverse mortgage means your loan balance grows — rather than shrinks — and there will be interest charges. The more you borrow against your equity, the more you’ll pay in interest. It’s often more of a concern for your estate and heirs, but it’s still one of the many reverse mortgage costs to consider.
Upfront mortgage insurance
The FHA charges an upfront mortgage insurance premium equal to 2% of your home’s value. For example, if your home is worth $400,000, your upfront MIP would cost $8,000.
Annual mortgage insurance
HECM loans 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 over time, you can expect your annual MIP amount to increase as well.
Should you finance your reverse mortgage costs?
Getting a handle on reverse mortgage fees is only half the battle; you’ll need to determine how to pay for them — especially the upfront expenses.
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 you’d reduce the amount of equity you can borrow, according to the Consumer Financial Protection Bureau (CFPB).
It will also cost you more in the long run because you’re adding those costs to your loan amount and also covering the ongoing interest and mortgage insurance charges on your larger balance as a result.
How reverse mortgage costs affect your loan
A downside of a reverse mortgage is that the many costs can add up to thousands of dollars. Additionally, if you have an adjustable interest rate, it could change monthly and increase your outstanding loan balance more rapidly, along with your annual mortgage insurance premiums.
It’s also important to note that your reverse mortgage loan amount will depend on several factors, including:
- Your home’s appraised value, sale price or HECM loan limit (currently $822,375 for 2021), whichever is lowest
- Your available home equity, which should equal 50% or more
- Current interest rates
- The youngest borrower’s or eligible non-borrowing spouse’s age
Use a reverse mortgage calculator to get an estimate of how much you may qualify to borrow.
How to cover your ongoing loan costs
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 set aside a portion of the funds to cover your ongoing reverse mortgage costs:
Lump sum. You’ll receive 60% of your maximum loan amount just once. However, you’ll have 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 home equity line of credit (HELOC). 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.
You may also combine a line of credit with either a term or tenure option. Having access to a credit line and continuous income can help you stay current on taxes, insurance, maintenance and homeowners association fees.
Alternative ways to keep up with 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 (IRA) funds