Understanding Reverse Mortgage Costs

What Does a Reverse Mortgage Cost?

Like any mortgage, reverse mortgages come with various costs and fees. Understanding these expenses upfront helps you make an informed decision and compare offers from different lenders. The good news is that most costs can be financed into the loan, meaning you don't have to pay them out of pocket.

Major Costs of a Reverse Mortgage

1. Mortgage Insurance Premium (MIP)

For HECM loans, the FHA charges mortgage insurance to protect both you and the lender. This comes in two parts:

• Initial MIP: 2% of your home's appraised value (or the FHA lending limit, whichever is less), paid at closing
• Annual MIP: 0.5% of the outstanding loan balance, charged yearly and added to your loan balance

Example: For a home appraised at $400,000, the initial MIP would be $8,000.

2. Origination Fee

Lenders charge an origination fee for processing your loan. For HECMs, this fee is regulated:

• $2,500 for homes valued at $125,000 or less
• 2% of the first $200,000 of home value, plus 1% of the amount over $200,000 for higher-value homes
• Maximum cap of $6,000

Example: For a $400,000 home, the origination fee would be: (2% × $200,000) + (1% × $200,000) = $4,000 + $2,000 = $6,000

3. Closing Costs

Standard closing costs are similar to those of a traditional mortgage and typically include:

• Appraisal Fee: $300-$600 (required to determine home value)
• Title Search and Insurance: $400-$1,000
• Survey: $150-$400 (if required)
• Recording Fees: Vary by location
• Credit Report: $30-$50
• Flood Certification: $15-$25
• Document Preparation: $75-$150

Total closing costs typically range from $2,000 to $5,000, depending on your location and loan specifics.

4. Counseling Fee

HUD-approved counseling is required and typically costs $125 or less. Some counseling agencies offer free sessions. This cost cannot be financed and must be paid before closing.

5. Servicing Fee

Some lenders charge a monthly servicing fee for managing your loan, sending statements, and disbursing funds. This fee is typically $25-$35 per month and is added to your loan balance. Many lenders now include servicing at no additional charge.

Interest Rates

Reverse mortgages are available with either fixed or adjustable interest rates:

Fixed Rate

• Rate stays the same for the life of the loan
• Only available with lump sum payment option
• Provides payment predictability

Adjustable Rate

• Rate can change over time based on market conditions
• Available with all payment options (monthly, line of credit, combination)
• Has rate caps to limit how much the rate can increase

Interest on a reverse mortgage compounds over time and is added to your loan balance. You don't pay it monthly—it accumulates until the loan is repaid.

Total Cost Example

Here's an example of upfront costs for a $400,000 home:

Can Costs Be Financed?

Yes! Most reverse mortgage costs can be financed into the loan, meaning they're deducted from your available proceeds rather than paid out of pocket. The only exception is the counseling fee, which must be paid upfront.

Ways to Reduce Costs

• Shop Multiple Lenders: Compare origination fees and interest rates from several lenders
• Negotiate: Some fees are negotiable, especially origination fees
• Choose the Right Product: Select the payment option that best fits your needs
• Consider Timing: If you plan to stay in your home long-term, upfront costs matter less over time

The True Cost: Looking Long-Term

Because interest compounds on a reverse mortgage, the loan balance grows over time. The longer you have the loan, the more interest accrues. This is an important consideration when evaluating whether a reverse mortgage makes sense for your situation.

However, remember that you're protected by the non-recourse feature—you'll never owe more than your home is worth when the loan comes due.