What are the costs of a HECM?

HECMs are generally more expensive than traditional forward mortgages or Home Equity Loans/HELOCs. Why? Because the HECM affords you the option to never make another mortgage payment as long as you live in the house, protects you from any cross over risk (i.e. the home is worth less than the amounts owing or could be owed if all money drawn, on the HECM), leaves you and your heirs any remaining equity in the home, and guarantees the availability of your HECM funds regardless the financial condition of your lender. Virtually all of the costs associated with a reverse mortgage can be financed with your loan, so there’s no immediate out-of-pocket cost. The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due. However you will have to pay the Counseling Fee, an Appraisal Fee and possibly a Credit Fee out of your own pocket initially, and if you fail to qualify, these costs are your out of pocket expenses and would not be reimbursed. If you fund the HECM, you can repay yourself these costs.

Depending on the loan option you choose, initial costs may include an origination fee, closing costs, and an Upfront Mortgage Insurance Premium (MIP) (required for HECM loans). There are available what are called “Lower-Cost HECM” pricing options, which eliminates nearly all origination and closing costs in exchange for a monthly service fee and/or a higher mortgage rate than normal.

Ongoing annual costs charged on the HECM outstanding balance include interest, mortgage insurance premiums (MIP), and if you selected a Lower Cost HECM, you may have a monthly service fee of between $15-$30.

The largest single cost can be the Upfront MIP. That fee will be 2.0% of the lower of the appraised value, sales price or Federal limit of $636,150, regardless what amount you may actually draw on the HECM. This MIP is paid to HUD, not the lender. It is the cost of the HECM features and HUD’s guarantees. Other closing costs are typical of a traditional mortgage loan.

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