Reverse Mortgage Closing Costs
As with any type of home financing program, there are certain closing costs associated with a Reverse Mortgage. These will include credit reporting fees, title insurance, escrow fees, recording fees, and so on. However, because reverse mortgages work quite differently from traditional home loans, some of the closing costs will be a bit different as well.
The first thing you should know about Reverse Mortgage closing costs, is that most of them can be paid using the proceeds of the Reverse Mortgage. In most cases, the only closing cost homeowners need to pay up front is the fee for Reverse Mortgage counseling. The fees for this service can vary, but the government strictly regulates housing counseling agencies to prevent them from charging unreasonably high fees. The counseling agencies are also not allowed to turn away a homeowner or withhold their counseling certificate due to an inability to pay.
Other major closing costs associated with Reverse Mortgages include the following:
- Origination Fee
- Appraisal Fee
- Mortgage Insurance Premiums
The origination fee covers the lender’s operating costs that are associated with originating the reverse mortgage.
Under the Home Equity Conversion Mortgage (HECM) program, which accounts for nearly all reverse mortgages in the U.S., the maximum origination fee that lenders are allowed to charge is 2% of the initial $200,000 of the home’s value and 1% of the remaining value, with a cap of $6,000.* So, for example, if the home’s value is $300,000 the origination fee would be $5,000 (2% of $200,000 ($4,000) plus 1% of $100,000 ($1,000)). Note that some lenders will waive or reduce the origination fee for certain products. Ask your lender for details.
The appraisal fee covers the cost of the appraiser’s assessment of the home’s current market value.These fees can vary greatly by region, value of home, condition of home and other factors; however, the average cost of a reverse mortgage appraisal fee is around $450.*
According to the National Reverse Mortgage Lenders Association, this fee is generally paid upfront in cash and not paid using the Reverse Mortgage Proceeds.
If the appraiser finds any significant problems, the homeowner is required to hire a contractor to make any needed repairs. In some cases, the cost of the repairs can be paid for using the Reverse Mortgage proceeds. Talk to your lender or see the NRMLA’s website for details.
Once the repairs are completed, the same appraiser will come back out to the home to conduct a follow-up inspection. This inspection generally costs around $125.*
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Paying mortgage insurance is slightly different with a Reverse Mortgage. In a Reverse Mortgage, the borrower is responsible for two mortgage insurance premiums (MIPs). The first MIP is paid by the borrower to the FHA upon closing.
This initial MIP is based on the amount of funds withdrawn during the initial year. If the borrower is going to withdraw 60% or less of the available funds in the first year, then he or she will be charged an upfront MIP of 0.50%* of the appraised value of the home. If the borrower is going to withdraw more the 60% of the available funds, then he or she will be charged 2.50%* of the appraised value.
For example, on a home that’s worth $300,000, the MIP would jump from $1,500 to $7,500 if they withdrew more than 60% of the funds in the first year.
In addition to the upfront MIP, the Reverse Mortgage borrower will also be charged an annual MIP. This fee does not come out of the Reverse Mortgage’s available funds. Instead, it accrues over time and it is paid once the loan itself becomes due and payable.
According to the NRMLA’s website, the annual premium is equal to 1.25% *of the outstanding loan balance.
Keep in mind that this is simply a brief overview of the major closing costs associated with a reverse mortgage. Talk to you lender for details on any and all closing costs that will be tied to your particular Reverse Mortgage.
*subject to change; figures based on data from April 2015