EXPLAINING THE CLOSING COSTS AND FEES OF A REVERSE MORTGAGE LOAN
Reverse mortgages have significant upfront closing and ongoing costs.
In addition to state, county and specific fees, reverse mortgage fees associated with your loan will vary depending upon the costs your lender pays on your behalf (usually in exchange for a higher rate of interest on the loan). The Upfront Mortgage Insurance Premium (MIP) paid at loan closing will be 2.0% of home value (as limited by the Federal maximum of $679,650) regardless of the amount you initially draw down. Other costs are similar to regular forward mortgages (though on FHA and other loans there is also Upfront MIP). You may also pay an origination fee, which cannot exceed $6,000 under a formula provided by HUD.
However, an advantage of this loan is that you may finance all of the closing costs into the loan itself to limit the effect of any out-of-pocket fees.
What are the upfront Closing Costs?
Appraisal Fees: Prior to underwriting the loan, the lender assigns an appraiser to estimate the value of the home. The average fee for an appraiser nationwide is $450 according to NRMLA (National Reverse Mortgage Lenders Association). If the appraiser also identifies that repairs need to be made to the home, they will revisit the home to verify the repairs were completed and typically charge $100-150 for the follow-up visit.
For more information on these and other fees, see the NRMLA Application, Fees, and Disclosures webpage.
Closing Costs: These are costs associated with traditional forward mortgages as well as reverse mortgages. Below is a summary of the expected costs as provided by NRMLA. These costs can be rolled into the reverse mortgage loan amount, and may not need to be paid in cash upfront by the borrower.
- Credit Report Fee: $20-50
- Flood Certification Fee: $20-30
- Escrow Fee: $150-800
- Document Prep Fee: $75-150
- Recording Fee: $50-500 on average, but in New York between mortgage, assignment and CEMA costs, the recording fees in New York counties or cities can be as high as $2,000.
- Courier Fee: $50
- Lender Title Insurance: Varies by loan amount and region, but in New York state you can expect to pay up to 1.5% of the mortgage amount (as increased by 150% to account for negative amortization on the account) which covers title insurance and the mortgage recording charges.
- Pest Inspection: $100
- Survey: $100-$250
- Attorney, closing and settlement fees: In New York, this fee can average $1,500-$1,700. Although NRMLA does not address in its survey of average costs, this is nonetheless a significant cost.
For more information on NY Real Estate transaction tax see Real Estate Tax.
Initial Mortgage Insurance Premium: This up-front fee is charged by the Federal Housing Authority (FHA) and funds FHA’s guarantees provided to the lender and the consumer. This premium is paid upfront at loan closing, and will be 2.0% of the value of the home (limited to $679,650).
Loan Origination Fee: The origination fee is charged by the lender. The amount of the fee will directly depend on the value of the home in question. The FHA insured Home Equity Conversion Mortgage is regulated by HUD. As a result, there is a HUD mandated cap on the origination fees and percentages. There is a maximum cap of $6,000 regardless of the home’s appraised value. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. For more information on these costs, visit the NRMLA Reverse Mortgage Fees page.
What are the Annual Ongoing Costs of a Reverse Mortgage?
Interest: Interest is charged each year just as with other mortgage products. On a traditional forward mortgage loan, interest along with principal is paid each month by the borrower until the loan is paid off. With a reverse mortgage, the opposite can occur. At the borrower’s option, no mortgage repayment of interest, mortgage insurance or principal need be made until the loan is due and payable at which point the principal and the interest must be paid off. This is usually done by selling off the home or family members and heirs paying off the mortgage or buying the home if its value is less than the mortgage.
MIP (mortgage insurance premiums): HECM borrowers are charged MIP on a monthly basis, however these fees accrue over time and are paid once the loan is due and payable. The annual mortgage insurance premium is an annual rate 0.50% charged 1/12 on the monthly outstanding loan balance.
Responsibility for home costs: As with all other mortgages, continuing to pay property taxes, insurance, maintenance and other homeowner costs is required with a reverse mortgage loan. If the borrower violates the terms of the mortgage such as by not paying property taxes or neglecting the property, the lender can seek to foreclose and the borrower could lose their home. Be aware that borrowers do have a legal right and a window of time to cure a default to prevent or stop a foreclosure from the lender.
Servicing fee: Typically, $20-$35 per month and usually only applies to Lower Closing Cost Loans where the lender has contributed to the borrower’s costs and is attempting to recover those costs through service fees. Usually such service fee arrangements are on higher interest rate loans.
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