Loan Costs

The amount of fees associated with obtaining a HECM reverse mortgage are limited by FHA guidelines, and are generally lower than the fees associated with other types of reverse mortgages. Sometimes, state or local government agencies offer specialized plans that are specific to local areas, and fees associated with these specialized reverse mortgages may be less than the HECM, depending on the municipality.

However, most of the locally governed reverse mortgages can only be used for specific purposes, such as home repairs or for paying property taxes, and are usually only available to low income homeowners.

Most of the costs involved can be paid from the loan proceeds to reduce out-of-pocket expenses. Costs include an origination fee, closing costs, mortgage insurance, servicing fees, and interest.

The origination fee is typically limited to two percent of the home’s value or 2 percent of the maximum amount allowed in your region, whichever is less. If the 2 percent is less than $2,000 however, a lender may still charge up to $2,000, regardless of the home’s value. Some lenders may not charge the full 2 percent, so it is worthwhile to comparison shop between three or four lenders before making a decision.

Closing costs include fees for appraisal, title search, surveys, inspections, and other third party services. The mortgage insurance premium ensures that you receive the loan advances promised to you, even if your lender becomes insolvent or the value of your home decreases. It also gives you assurance that the total debt will never exceed the value of your home when the loan is repaid out of your estate.

The mortgage insurance premium consists of two parts; the upfront two percent of the home’s value mentioned above, and through 0.5 percent being added to the interest rate charged on the rising loan balance.

The servicing fee is usually minimal, around $30 a month. It is not necessary to actually pay this fee out-of-pocket every month; a lender may set aside a set dollar amount from the proceeds, and add the fee to the loan balance every month.

Overall, the total upfront costs may be as high as five or six percent of the home’s value.