A reverse mortgage is a unique type of loan that lets homeowners borrow money by leveraging their home’s equity. While there are plenty of benefits to a reverse mortgage, homeowners will want to consider the associated closing costs before applying. Out of the 3 types of reverse mortgages, the Home Equity Conversion Mortgage—HECM—is the most popular. This is because it offers the most borrower protection, has fewer financial requirements, and gives the borrower the most spending autonomy. So, while many of these fees apply to the other types of reverse mortgages, let’s look at HECM fees to better understand reverse mortgage closing costs.
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Upfront Costs
HECM Counseling
To acquire a reverse mortgage, borrowers are required to receive counseling from an HECM counselor who has been approved by the U.S. Department of Housing and Urban Development. While a counseling agency may charge you a reasonable fee, they are required to address your personal financial situation and cannot charge you a fee you’re unable to afford.
Origination Fees
Lenders typically charge an origination fee to process, underwrite, and close your loan. According to Investopedia, an origination fee is typically 0.5% and 1% of the loan amount. It is also useful to note that origination fees may not exceed $6,000.
Appraisal Fees
When preparing to borrow a reverse mortgage loan, you’ll want to be prepared to have your home appraised by an appraisal management company. This step’s cost will vary depending on conditions such as the size and age of your home.
Initial Mortgage Insurance Premium
An initial Mortgage Insurance Premium—initial MIP— is paid to the Federal Housing Administration and guarantees you will receive your expected loan advances. According to the U.S. Department of Housing and Urban Development, the initial MIP will be 2%.
Third Party Closing Costs
Fees for loan recording, credit checks, and title insurance will need to be paid before finalizing your reverse mortgage. To keep these costs organized, your lender can provide you with a comprehensive breakdown of all the charges within your closing disclosure.
Ongoing Costs
Annual Mortgage Insurance Premium
After your initial mortgage insurance premium payment, you’ll begin making an annual payment to your MIP. These payments will be 0.5% of the outstanding mortgage balance. It is also possible to roll MIP costs into your reverse loan, meaning it will accrue interest for the life of the loan.
Servicing Fees
Lenders are responsible for sending your account statements, distributing your loan proceeds, and helping you meet your loan requirements. Thus, they’ll need to be paid servicing fees. This will cost no more than $30-$35 depending on if the interest rate adjusts monthly.
Property Charges
To qualify for a reverse mortgage, the Federal Housing Administration must be able to trust that you can pay long-term property costs. This includes regular payments to charges such as homeowners insurance, property taxes, and—depending on your location—hazard insurance premiums.
Be Prepared for Reverse Mortgage Closing Costs
If you want to use your home’s equity to your benefit, it’s time to apply for a reverse mortgage. Knowing what closing costs to expect will help you be better prepared to qualify for the loan. Need help taking the first step? Millennial Title’s knowledgeable team is more than happy to answer any questions you may have regarding reverse mortgages or any other areas of our expertise.
