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According to the Consumer Financial Protection Bureau, reverse mortgages are more expensive than other types of loans — and unlike traditional mortgages, the amount you owe grows the longer you draw from it. Many seniors find themselves in need of cash for health care, family support or retirement. If you are 62 or older and have built up equity in a home that you own, a reverse mortgage might be a way to access that equity.
Reverse mortgages allow qualifying individuals to get cash now, in the form of a lump sum, a line of credit or monthly payments, and in return, you give up that equity upon the sale of your house when the loan comes due. We cover both the individuals fees and expenses associated with taking out a reverse mortgage.
- What are the costs associated with a reverse mortgage?
- Should I pay closing costs upfront or bundle them into my loan
What are the costs associated with a reverse mortgage?
If you’re interested in a reverse mortgage, you should know that there are various fees and other costs associated with obtaining one. These include origination fees, interest payments, mortgage insurance and closing costs.
There are typically one-time costs, like origination fees, which are capped at $6,000. You’ll also pay closing costs that include appraisal fees, inspections, credit checks and more. Data from the National Reverse Mortgage Lenders Association (NRMLA) shows that closing costs for home equity conversion mortgages (HECMs) start at $600 and go up to more than $2,000, depending on the size of your loan and where you live — although you may be able to add these costs onto the loan itself. You’ll also be on the hook for the first mortgage insurance premium, which is 2% of the home’s appraised value up to the FHA lending limit of $726,525.
You’ll also have ongoing fees associated with your reverse mortgage, including interest, service fees, the annual mortgage insurance premium, property taxes and flood insurance if you have it.
Below, we’ll go into more detail about what you might owe in reverse mortgage fees, and your options for how to pay the associated fees.
These are one-time costs associated with getting your loan, including closing costs, a loan origination fee and your initial mortgage insurance premium. Below are the average costs associated with upfront fees for Home Equity Conversion Mortgages, the most common type of reverse mortgage, with data from NRMLA.
This is a one-time payment to your lender for costs associated with your loan. HECM lenders can charge $2,500 or 2% of the first $200,000 of your home’s value and 1% of the remaining value of your home. Fees for HECMs are capped at $6,000.
Mortgage insurance premium
Borrowers are required to purchase mortgage insurance on reverse mortgages. You will pay an upfront fee of 2% of the home's appraised value up to the value of the FHA lending limit, which is $726,525. (You will also be responsible for an annual fee, which you will see below.)
In order to obtain a reverse mortgage, you must have an appraisal to find out the current market value of your home. This is typically done ahead of obtaining the reverse mortgage and is paid for out-of-pocket. Appraisals average $450, with an estimated $125 follow-up fee if you need to make repairs to bring your home into compliance.
You’ll need to spring for repair costs if the appraiser finds any structural problems with your home that would make it not in compliance with building codes — such as foundational problems, roof problems or termite damage. Federal regulations require your home to meet these guidelines, but you may be able to pay for the repairs with proceeds from your reverse mortgage, depending on the cost of the repairs.
Closing costs are another one-time set of fees, but they can be extensive and are highly variable depending on where you live, what requirements there are for the reverse mortgage you need and how much your house is worth. Below is a table that looks at some potential closing costs and ranges, based on NRMLA data. These costs can usually be tacked onto the loan itself, or can be paid upfront by the borrower.
|Credit report fee||$20-$50|
|Flood certification fee||~$20|
|Escrow or closing Fee||$150-$800|
|Document prep fee||$75-$150|
|County recorder's fee||$50-$500|
|Title insurance||Depends on loan size|
Monthly and annual expenses
In addition to your upfront and closing costs, you will also be responsible for recurring charges involved in your loan. These include your annual mortgage insurance premium, which is 0.5% of the outstanding mortgage balance; your homeowners insurance and property taxes, as well as your flood insurance if you are required to hold it; and servicing fees paid to your lender, which is typically a monthly charge of $35 or less.
Insurance rates on reverse mortgages are different than other types of mortgages because you don’t pay interest as you go — you’re receiving money, after all. Because of that, the interest is compounded and charged at the end of the loan, when you sell your house or no longer live in it. You can choose a fixed or adjustable rate.
With a fixed-rate mortgage, the interest rate will stay steady, but you must take one lump sum instead of a monthly payment, and that sum is limited to 60% of the principal limit of the loan.
With an adjustable rate, you can get a line of credit, and only pay interest on the amount you take out — but you are subject to a fluctuating interest rate, either monthly or annually, that might increase quite dramatically. Make sure you speak with a qualified lender extensively about what options work best for your situation.
Should I pay closing costs upfront or bundle them into my loan?
You have the option of bundling closing costs into your reverse mortgage loan rather than paying them upfront. The advantage of doing so is that you don’t need to come up with the often hefty sum of these fees in order to secure the loan. The downside is that the closing costs will reduce the amount you have available to you.
Your interest rate will be heavily influenced by the type of payout you choose for your loan. If you get a lump-sum payout, you will be able to qualify for a fixed interest rate, which will often work out to be lower than an adjustable rate. If you receive a line of credit or a monthly payment, you’ll likely be looking at an adjustable interest rate, and your terms will be different depending on the specifics of your loan. For this reason, it’s important to speak with your lender about what you are looking to do with your loan, and which payment option for your loan’s closing costs works best for you.
With a reverse mortgage, you pay interest only on the amount you have drawn. If you choose a lump sum, and you plan to use the money you get from your reverse mortgage quickly, then paying fees upfront and securing a lower interest rate is likely the way to go. If you want to get a line of credit, with plans to use the money some time in the future, than bundling the closing costs into the loan, likely with a higher interest rate, probably makes the most sense.
Because you won’t pay interest monthly, it might be tempting to just sign on the dotted line and get the money flowing. But when the loan comes due, either upon your death or when you decide to sell your home, you or your family members will need to pay it back. So make sure you read all the fine print and borrow only as much as you need. This avoids the need to explore refinancing options on your reverse mortgage if you end up being unhappy with your terms later on.