Reverse mortgages have gained attention as a financial option for seniors seeking to tap into their home equity. While they offer certain benefits, it’s crucial to understand the various fees and costs associated with reverse mortgages. In this blog, we’ll break down the expenses involved, helping you make an informed decision about whether a reverse mortgage aligns with your financial goals.

1. Upfront Costs:

Reverse mortgages come with a few “upfront” costs to be aware of:

Origination Fee: This fee covers the administrative costs of processing the loan. It’s typically a percentage of the loan amount and can vary among lenders. The origination fee is capped at $6,000 by law for HECM reverse mortgages. This fee goes to the reverse mortgage broker and is paid out of loan proceeds. This fee is paid at closing and only due if the loan closes.

Mortgage Insurance Premium (MIP): Reverse mortgages are insured by the Federal Housing Administration (FHA). Borrowers are required to pay a MIP, which helps fund the insurance that guarantees your loan will be a non-recourse loan. This fee goes directly to the FHA MIP fund and is paid at closing.

Closing Costs: These costs can include various fees such as title insurance, notary and recording fees. It’s important to review the closing costs associated with your loan and understand how they impact your financial picture. These fees go directly to the 3rd parties who provided the service.

Appraisal Fee: To determine the value of your home, an appraisal is necessary. The appraisal fee covers the cost of the appraiser’s evaluation and report. The appraisal fee goes directly to the appraisal management company, not to the reverse mortgage company. This fee is the responsibility of the client to pay up front before the loan closes. If our clients have a financial hardship, this fee can be paid at closing in some cases.

Counseling Fee: Before obtaining a reverse mortgage, borrowers are required to undergo counseling with an independent HUD-approved counselor. The counseling fee covers the cost of this session and ensures borrowers are well-informed about the terms and implications of the loan. This session is just a phone call to ensure your broker provided you accurate information. The fee for this service is paid directly to the counseling company. Some counselors allow this fee to be paid at closing, but not all of them offer this.

2. Ongoing Costs:

In addition to the upfront expenses, there are ongoing costs associated with reverse mortgages:

Interest: Like any loan, reverse mortgages accrue interest over time. The interest is added to the loan balance, reducing the equity available in the home. Interest rates can vary depending on the type of reverse mortgage you choose. These costs don’t need to be repaid until a maturity event is triggered.

Servicing Fees: These fees cover the administrative costs of managing the loan, such as sending statements and managing your account. While not all lenders charge servicing fees, it may be a cost that is added to the loan balance depending on your lender.

MIP: In addition to the upfront MIP, borrowers are also required to pay a monthly mortgage insurance premium. This premium offers additional protection for heirs in case the loan balance eventually exceeds the home’s value. This cost is added to the loan balance and is not repaid until a maturity event is triggered.

Understanding reverse mortgage fees and costs is a vital step in making an informed decision about your financial future. While these loans can provide financial relief for seniors, it’s essential to weigh the expenses against the benefits. Consulting with financial advisors and reverse mortgage experts can help you navigate the complexities and make the best choice for your unique situation. Remember, a well-informed decision is the foundation of financial security in your retirement years.