Reverse Mortgages Costs: What to Expect

Reverse mortgages are meant to be a low-cost financial option for senior citizens with limited or fixed incomes. While borrowers are not required to make month-to-month mortgage payments, there are a number of upfront costs that must be paid. These are often capped by law so they are usually very reasonable. However, reverse mortgages are by no means free. Some of the costs you can expect to pay in order to obtain a reverse mortgage include:

Origination Fees

Origination fees cover the operating expenses of the lender. This includes office overhead, marketing, staffing and other costs borne by the mortgage lender. By law, FHA reverse mortgages under the Home Mortgage Equity Conversion (HCEM) program are capped at 2 percent of the home value or county lending limit (whichever is lesser) for the first $200,000 financed. Anything beyond $200,000 is factored in at 1 percent. Overall, the origination fees cannot exceed $6,000.

For example, if you were financing a $250,000 home, you would pay 2 percent of $200,000, which is $4,000, plus 1 percent of $50,000, which is $500 for a total of $4,500. If you were getting a reverse mortgage for a $750,000 home, the fee would be calculated at $4,000 plus 1 percent of $550,000 ($5,500), which equals $9,500. However, it would be capped so you would only pay $6,000.

Mortgage Insurance Premium

Maximum Insurance Premiums (MIP) amount to 2 percent of the home value up front and then 0.5 percent of the loan balance annually thereafter. This insurance covers you in case the servicer of your loan goes out of business.

Appraisal Fees

In order to determine your homes value, it must be appraised. These costs vary by location, but generally will be around $300 to $400.

Closing Costs

In addition to origination fees, there are number of loan closing costs. These include a credit report, flood certification fee, escrow, document preparation, recording fee, courier fee, title insurance, pest inspection and a survey of the property. In all, these typically add up to around $1,000 to $1,250 total.

Service Fee Set Aside

When your loan closes, the servicer has a right to set aside the projected costs of administering your loan for the entire life of your reverse mortgage. This is usually calculated based on your age and life expectancy and amounts to around $30 to $35 a month. Overall, this can add up to several thousands of dollars.

Conclusion

Overall, you are looking at paying anywhere between $6,000 and $10,000 in costs upfront to get your reverse mortgage started. For senior citizens with little income, this cost can be burdensome. Luckily, many mortgage lenders allow you to finance your closing costs and origination fees. This rolls it all into your reverse mortgage so you do not have to pay it until you no longer occupy the home. However, by paying them upfront, you avoid paying interest on the closing and origination fees.

At any rate, your loan counselor and the lender have an obligation to apprise you of the total costs of the loan and ensure that you understand your financial responsibilities. Be sure they do so - otherwise, take your business to another mortgage lender.

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