Additional Costs and Considerations with a Reverse Mortgage
All mortgages come with costs. However, reverse mortgages have additional considerations. While other mortgages have the same types of fees, it is possible that you will pay more with a reverse mortgage, although this will depend on the specific lender that you choose, which is one reason it is important to do your due diligence when finding a lender in the first place.
What sorts of costs and fees might you pay? They fall into five different categories, as follows:
MIP and AMIP (or PMI): If you take out an HECM loan, you’ll be responsible for mortgage insurance premium payments – one lump sum at the beginning and then monthly payments over time, wrapped into the loan. However, these can be financed into the loan so you do not have to pay them out of pocket. Just realize that this ultimately adds to the balance due at the end of the loan and could be a hurdle to your heirs if they wish to keep the home after you move out or pass away. In contrast, if you take out a proprietary reverse mortgage, such as a jumbo reverse mortgage, you’ll likely be responsible for paying private mortgage insurance (PMI) on your loan.
Third-Party Charges: You may see any number of charges from a range of different third parties. For instance, you’ll have to pay for your home appraisal. You’ll need to pay recording fees, as well as for surveys. You’ll have charges related to your title search and insurance, as well as a number of other fees. These will be spelled out for you at the time of closing.
Origination Fee: Your reverse mortgage will come with what’s called an origination fee. This a payment to the lender for processing the loan. The maximum origination fee is $6,000, but it will likely be charged as “the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000,” according to HUD.
Interest: You will be charged interest on your loan just as with any other mortgage loan. However, unlike other loans, you are not required to make any payments during the life of the loan. All interest becomes payable when you sell the home, move out permanently, or when you pass away. The exact interest you will be charged will vary based on market conditions, your home, the lender in question, and other factors.
Service Fee: Your lender is responsible for a number of activities during the life of the loan that incur costs, both in terms of materials and in labor hours. For instance, the lender will be responsible for calculating and disbursing funds, sending you account statements, and the like. Monthly servicing fees are designed to compensate lenders for those efforts. However, with FHA-backed reverse mortgages, those servicing fees max out at $30 per month with a fixed rate loan or a loan that adjusts annually. It is capped at $35 per month for loans that adjust monthly. This may not be the case with proprietary reverse mortgages through private lenders.
As you can see, there are a number of costs that must be factored into your decision to apply for a reverse mortgage. While few of these costs must be paid up front, they eventually come due, and could present an issue for heirs who want to keep the property after you move out or pass away.
However, if you have no heirs, or your heirs do not have any desire to own your home, and you want the lender to handle selling your home at the end of the loan, these may not be significant hurdles.