What Are Reverse Mortgage Fees?
Reverse mortgages can relieve your financial pressure in retirement by giving you access to your home equity in cash. But there is a price to pay for the convenience — by way of fees and other costs.
In general, you will pay a loan origination fee of up to $6,000, as well as an upfront mortgage insurance fee of 2% of the loan total. Then there are numerous other smaller fees your lender may or may not charge.
The majority of borrowers choose reverse mortgages overseen by the Federal Housing Administration, and lenders who work with the FHA follow a set of strict guidelines for the fees they charge. These include upfront charges when you close on the loan, as well as ongoing fees like mortgage insurance premiums and servicing fees. Certain fees have set maximums and minimums, such as the loan origination fee, while others can be negotiated, such as the counseling fee. We’ll help you make sense of them all.
In this article, we will cover:
- What is a reverse mortgage?
- Common fees on a reverse mortgage
- Why reverse mortgage fees matter
- Other costs to consider
What is a reverse mortgage?
Many seniors find themselves short on money in retirement. One in five Americans have no retirement savings at all, and 46% of adults haven’t planned for the possibility of outliving their savings, according to a 2018 study by Northwestern Mutual.
A reverse mortgage can offer a solution. This type of mortgage leverages the equity you’ve built up in your home. Instead of making payments, your lender pays you in a lump sum or monthly payments, or a combination of both.
However, your loan balance increases as interest is added and your home equity decreases as you access your home equity cash amount. The loan is settled up after you move from the home or pass away — typically by selling the home.
Who qualifies for a reverse mortgage?
You must be age 62 or older to qualify for this type of mortgage. You also have to own your home outright or have a considerable amount of equity, which refers to the difference between the value of the home and any outstanding mortgage balances. The home must be your primary residence, which means it cannot be a rental property or vacation home.
There are three types of reverse mortgages you might qualify for: single-purpose reverse mortgages, proprietary reverse mortgages and Home Equity Conversion Mortgages (HECMs).
The HECM is by far the most common reverse mortgage, with 90% of reverse mortgage borrowers choosing this type. These reverse mortgages are insured by Federal Housing Authority and adhere to their strict guidelines.
To qualify for a HECM, you can’t be delinquent on any federal debt and you must have enough money for living expenses, like property taxes, insurance and homeowner association (HOA) fees. You’ll also have to meet with a HUD-approved HECM counselor ahead of time. Your lender will verify your credit history, income, assets and monthly living expenses.
Some private lenders offer their own, proprietary reverse mortgage programs that use their own guidelines. Single-purpose reverse mortgages are generally smaller in size and offered by local governments or nonprofits to help seniors with specific expenses.
Common fees on a reverse mortgage
Lender fees on reverse mortgages are very similar to those on conventional mortgage loans and include everything from appraisal fees to closing costs.
Most housing counselors will be able to advise you on what to expect. But for the most part, reverse mortgage fees can be sorted into two groups: upfront costs and ongoing fees. Upfront costs need to be paid as part of closing the loan, or in some cases can be financed into the loan. Ongoing fees endure over the life of the loan.
All of the below fees apply to HECM loans, the most common type of reverse mortgage. Proprietary or single-purpose reverse mortgages would have their own fee schedules and limits.
You may remember the host of fees that were associated with your mortgage when you first borrowed money. Reverse mortgages are very similar in that lenders charge many of the same fees.
Loan origination fee
You’ll need to pay your lender a loan origination fee on HECM loans, which compensates them for processing your government-backed reverse mortgage. The fee will be the greater of $2,500 or 2% on the first $200,000 value of the home, plus 1% of the amount over $200,000. However, the costs cannot exceed $6,000.
Here’s how much you’d pay for varying reverse mortgage amounts.
|Reverse Mortgage Loan Origination Fee by Loan Amount|
|Loan amount||Origination fee|
Upfront mortgage insurance premiums
The FHA charges 2% of the value of the home as an upfront mortgage insurance premium. This insurance protects the lender in the event that you fail to meet the terms of your reverse mortgage, giving them the confidence to make the loan. It also protects you if your lender fails.
“It’s a pool of money that’s set aside,” said Lynne Nixon, certified HUD Housing Counselor at American Consumer Credit Counseling.
This cost can be financed into the loan; any fees you finance into the loan will lower the total amount available to you and will be more expensive over time.
|Reverse Mortgage Upfront Insurance Fee by Loan Amount|
|Loan amount||Upfront Insurance fee|
You’re required to receive counseling to qualify for a HECM, and that counseling will usually cost you. The cost is “up to the agency,” Nixon said, but usually runs between $90 and $125.
This cost will depend on the lender, but most appraisals average around $450, according to the National Reverse Mortgage Lenders Association (NRMLA). While most borrowers pay the cost out-of-pocket, Nixon said you can finance that fee into the loan as well.
The closing costs will vary depending on the lender and the property type and location. These generally encompass a credit report, flood certification fee, escrow, document preparation, recording fee, courier fee, title insurance, pest inspection and survey.
Closing costs can run you $2,000 or more. Oftentimes, they can be financed into your loan.
Ongoing fees endure for the life of the loan. With a reverse mortgage, you can expect:
Mortgage insurance premiums
In addition to the 2% that’s due at closing, you’ll be charged a mortgage insurance premium of 0.5% of your outstanding loan balance on an annual basis.
This fee is not paid out of pocket. Instead, it’s added on to the loan balance and settled at the time the borrower passes away or moves out of the home.
|Annual Mortgage Insurance Premium by Loan Amount|
|Loan amount||Insurance premium|
This refers to monthly administrative fees that most borrowers likely won’t encounter. “Years ago everyone got a $30 or $35 fee, Nixon said. “Then, they stopped them and I didn’t see them for years. Once in a blue moon you’ll see them pop up.”
Why reverse mortgage fees matter
While reverse mortgage fees may not seem like the most important thing to consider while shopping, you do still need to run the numbers. These fees add to your total loan balance and will keep growing over time.
This reduces the amount you can borrow and also reduces the equity left in your home. Once you move from the home or pass away, you or your heirs will have to pay the total balance on the note — likely through selling the home.
Other costs to consider
Even though you will no longer be paying a monthly mortgage, you’ll still be responsible for all the costs associated with homeownership. That means ensuring you have enough money for property taxes, repairs and maintenance, and home insurance — including flood or hazard insurance, if required in your area. If your home is part of an HOA, you’ll have to calculate that into your monthly or yearly budget as well.
The bottom line
If you need the cash and other options aren’t appropriate for your situation, the fees associated with reverse mortgages are a small hurdle to surmount. You do have the option to finance most of the fees and you can (and should) shop around for the best lender both for fees and reputation.
Remember, you can even compare housing counselor fees. While most HECM counselors likely won’t top $125, you do have the option of asking for a reduced rate due to your financial circumstances or requesting a price quote from several different agencies.
The information in this article is accurate as of the date of publishing.