A reverse mortgage loan can be used as a financial tool for seniors age 62 and older who have sufficient equity in their homes. The Federal Trade Commission (FTC) (the nation’s consumer protection agency) encourages seniors to understand how reverse mortgages work. When researching reverse mortgage loan options, it is important to be aware of all the fees. Your lender will supply you with the TALC (Total Annual Loan Cost) which discloses the projected annual average cost of the loan, including the itemized costs. A reverse mortgage typically includes the following fees:
Origination Fee: Covers the expenses associated with originating a reverse mortgage loan. The maximum origination fee allowed is 2% of the first $200,000 of the home’s value and 1% of the remaining value of the home. Origination fees are capped at $6,000.
Mortgage Insurance Premium (MIP): The MIP is a fee paid by the borrower to the Federal Housing Administration (FHA). The MIP ensures that the borrower will receive their loan proceeds, even in the event that the lender becomes insolvent. In addition, if the sale of the home is not enough to pay back the balance of the reverse mortgage loan, the MIP protects the borrower or estate from owing more than the sale price of the home to repay the loan.
The Home Equity Conversion Mortgage (HECM) loan charges an upfront MIP equal to 2% of the home value not to exceed $13,583 plus an annual premium thereafter equal to .5% of the outstanding balance of the loan.
Appraisal Fee: An appraisal is required by the FHA to determine the value of your home. Appraisal fees vary, but typically average around $450.
Counseling Fee: Counseling fees vary by location. The Department of Housing and Urban Development (HUD) provides a list of approved Reverse Mortgage Loan counseling agencies.
Other Closing Costs: Other reverse mortgage closing costs may include:
- Credit report fee
- Flood certification fee
- Escrow, settlement or closing fee
- Document preparation fee
- Recording fee
- Courier fee
- Title insurance
- Pest Inspection
Interest: Interest accrues on the loan balance, and therefore the balance of a reverse mortgage will increase over time. However, if you take your proceeds as a line of credit, you will only be charged interest on the portion of the line of credit you have withdrawn.