Reverse Mortgage Fees and Costs
Lenders will typically charge several types of fees on a reverse mortgage, but these can be paid from the loan proceeds. At the time you apply for a reverse mortgage, the lender analyzes all of your income sources in conjunction with calculating the costs they will describe.
A reverse mortgage loan can include the following fees and costs:
The origination fee corresponds to the operating expenses of a lender in creating the reverse mortgage. Some lenders can waive or lower the origination fees on their products.
For HECMs, the maximum origination fee is 2% of the initial $200,000 of the home’s value plus 1% of the remaining value, capped at $6,000.
Mortgage Insurance Premium
The MIP is a closing and annual fee paid to the Federal Housing Administration to provide protection for both the borrower and the lender in a HECM reverse mortgage.
The FHA protects borrowers by providing access to their reverse mortgage proceeds when the lender servicing the loan is interrupted. Moreover, borrowers won’t owe more than the sale price of a home even if it’s less than the outstanding balance of the loan.
The MIP amount paid at closing depends on the funds withdrawn during the first year of the reverse mortgage. The upfront MIP is 0.50% of the home’s appraised value if you don’t withdraw more than the 60% limit of available funds in the initial year. Otherwise, the MIP is 2.50%.
The annual MIP is 1.25% of the outstanding loan balance; however, this is not deducted from your available funds, and will only be paid once the loan becomes due and payable.
The appraisal fee is the cost of getting an appraiser to determine the current market value of your home. Generally, this will be paid in cash before the loan is made, and is $450 on average, but varies depending on region and the value of the home.
The appraiser also inspects the property to see if it complies with home safety and building codes. If there are property defects discovered, you will need to hire a contractor for repairs. Afterwards, the appraiser will need to return to follow-up whether the repairs have been completed in order.
The repair costs can be paid for with proceeds from the reverse mortgage if the estimate is not greater than 15% of the Maximum Claim Amount, which is the value of the home at the time of origination (currently maxed at $625,000 for an HECM).
Other closing costs charged for a reverse mortgage are similar to those charged for other types of mortgages.
Reverse Mortgage Fees and Costs
The servicing fee covers the administration costs of the lender in servicing your loan. This is a monthly fee that can be fixed or included in the interest rate. Current regulations limit this monthly fee to $35.
For fixed servicing fees, the lender will set aside an amount from the total available proceeds on closing to cover the estimated costs of handling the account.
A reverse mortgage loan balance grows at a compounded interest rate, whether fixed or variable. Variable rates are usually tied to an index such as the 1-Yr. T-bill plus a margin specified by yield requirements.
Note that interest only grows on the actual amount of funds that you have received or withdrawn, not the total available amount.
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