What Are the Costs of a Reverse Mortgage?
When you take out a reverse mortgage, lenders charge upfront fees to set up your loan as well as ongoing expenses. Fees will vary depending on the type of reverse mortgage you obtain, but you can expect these fees with an HECM:
Appraisal fee: The lender will hire an appraiser to estimate the value of your home, as this determines how much money you can borrow. The appraiser will also inspect your home for any property damage. If there are significant problems, you will need to repair them before you can take out a reverse mortgage. Expect to pay a few hundred dollars for an appraisal, which is usually paid out of pocket, though it can depend on your region and type of property.
Closing costs: The lender will charge many of the same closing costs for a reverse mortgage as it does to set up a first-lien mortgage. Some of the closing costs include:
- Credit report fee.
- Title search, escrow and loan settlement fees.
- Document preparation fee.
- Recording fee.
- Title insurance, which depends on the value of the property and the state where the property is located. The more expensive the property, the more expensive the title insurance.
- Pest inspection.
Loan origination fees: The lender will charge an origination fee to process your loan. This fee is a percentage of the value of your home. The government limits how much lenders can charge for origination fees on HECM reverse mortgages.
For the first $200,000 of property value, the lender can charge 2% or $2,500, whichever is greater. If your home is worth more than $200,000, it can charge another 1% of the amount over $200,000. For example, if your home was appraised for $300,000, the lender can charge a maximum origination fee of $5,000 ($200,000 x 2% + $100,000 x 1%).
The limit for loan origination fees on HECM reverse mortgages is $6,000. Fees can be higher for proprietary reverse mortgages.
Initial mortgage insurance premium: The FHA charges an upfront fee to pay for its guarantee of HECM reverse mortgages, known as mortgage insurance. This initial fee for the Mortgage Insurance Premium, or MIP, is 2% of the maximum claim amount, which is typically the appraised value of your home when you take out the loan, according to HUD.
Points: Mortgage points are an optional upfront fee that you can pay to get a discount on your loan interest rate. In exchange for paying points, the lender will charge a lower interest rate on your reverse mortgage.
Loan interest: Reverse mortgages are loans, so you will owe interest for borrowing money. You do not need to pay the interest while you are living in your home. Reverse mortgages can charge fixed or adjustable interest rates. A fixed rate stays the same over the entire reverse mortgage. An adjustable rate can change over time based on a market index. Your reverse mortgage will list how often the rate can change.
If you use a reverse mortgage to take out a line of credit, you only owe interest when you borrow money through the line of credit. The lender won’t charge interest on the unused portion of your line of credit.
You should research all the possibilities for loans. Adjustable-rate mortgages often scare people, but the ARM features in an HECM can create more options and let the borrower use their equity more wisely.
Mortgage insurance: You will continue paying mortgage insurance to the FHA for guaranteeing your loan, an annual MIP of 0.5% of the outstanding mortgage balance. This is added to your outstanding loan balance, and you don’t have to pay for the mortgage insurance while you’re still living in your home.
Servicing fee: The lender can charge a monthly servicing fee for managing your loan. The maximum monthly servicing fee is $30 for fixed- or adjustable-rate loans that reset annually and $35 for adjustable-rate loans that reset monthly.
Lenders that charge a lower interest rate are usually charging more upfront, while low-cost lenders may charge a higher interest rate. The right choice depends on when you want to pay: upfront or over the course of the loan.
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