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Reverse Mortgage Costs
Many of the same costs that someone pays to obtain a loan to purchase a home (a traditional mortgage), or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, an up-front mortgage insurance premium (for all FHA loans including the Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain state specific closing costs. Interest rates must also be considered when determining the cost of obtaining a loan. Please refer to the section on Rates.
The major difference between a traditional mortgage and a reverse mortgage (HECM) is how the cost of the loan is disclosed to the borrower(s). Many traditional mortgages are structured in such a way that the costs are rolled into the interest rate and advertised as a “no cost loan” with no points and no fees; however, the reality is that the costs do exist, but are not transparent to the consumer since they have been buried in the interest rate. Unlike traditional loans, federally insured reverse mortgages (HECMs) are full disclosure loans. Back in 1988, when HUD (U.S. Department of Housing and Urban Development) & FHA (Federal Housing Administration) were developing the program, they incorporated the policy of full disclosure to prevent the “no cost” perception, which has been portrayed by lenders with traditional mortgages. The concept of full disclosure creates greater transparency as all the closing costs are fully disclosed. In most cases, these fees and costs are capped, and may be financed as part of the reverse mortgage.
Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to 2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 1.25 percent of the loan balance.
The MIP guarantees that if the lender or company servicing your reverse mortgage goes out of business, then the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid. Only the equity in your home, and no other assets, can be used as collateral when repaying a reverse mortgage. Please click here to learn when a reverse mortgage must be repaid.
An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range from $350-$450 for a single family home. Multi-family homes will incur a slightly higher fee due to the additional work required.
An appraiser not only determines the value but must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made.
If the appraiser uncovers property defects, then the property must be repaired as a condition of the reverse mortgage. Once the repairs are completed, the appraiser is paid for a second visit to make sure the repairs have been completed. Re-inspection fees will range from $75-$125. The cost of the repairs may be financed in the loan and generally can be completed after the reverse mortgage is in place. Some programs do require repairs to be completed prior to closing.
State Specific Fees/Other Closing Costs
Other closing costs will vary from state to state but those costs that are commonly charged to a reverse mortgage borrower include:
- Credit Report fee, which is generally $12 per borrower. Credit score is not considered in a reverse mortgage but the report is used to verify any federal tax liens or other judgments.
- Flood certification fee, which usually costs less than $20, determines whether the property is located on a federally designated flood plain.
- Escrow, Settlement or Closing fee. This fee generally includes a title search and various other required closing services. These costs will vary by state and can range from $250-$550.
- Recording fee is a charge to record the mortgage lien with the Registry of Deeds or County Recorder's Office. The recording cost will vary by state and can range from $100-$350.
- Title insurance is insurance that protects the lender (lender's policy) or the buyer (owner's policy) against any loss arising from disputes over ownership of a property. The cost for title insurance varies by size of the loan, though in general, the larger the loan amount, the higher the cost.
- Document Preparation fee is a fee charged to prepare the final closing documents, including the mortgage note and other recordable items. The cost will range from $60-$125.
- Courier fee covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. The cost is generally under $50.
Service Fee Set-Aside
The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected administrative costs of the loan. Although the set –aside is deducted, it must be made clear that the set-aside does not become part of the loan balance and does not accrue interest charges. It must also be noted that all loans have a service cost but not all loans are required to disclose the cost to the consumer. Again, this is the difference between full disclosure, which is mandated by HUD with reverse mortgages (HECMs), and traditional mortgages, which have adopted the practice of rolling the costs into the interest rate.
Federal regulations allow the loan servicer to charge a monthly fee that ranges from $25-$35. The amount of money set-aside is largely determined by the borrower's age but will also be impacted by interest rates. Generally, the set-aside can range from a couple thousand dollars up to several thousand dollars. Please note that the service fee set-aside not used reverts back into the equity of the home. The borrower(s) are only charged for the actual number of months that the reverse mortgage is outstanding.
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