The primary FHA reverse mortgage fees are:
- Origination Fees – paid to the reverse mortgage lender
- Mortgage Insurance Premium – paid to the FHA
- Closing Fees – such as title insurance, appraisal fees, etc.
- Servicing Fees – some lenders do not charge these.
- Counseling Fee – paid to the HECM Counseling agent you choose
Borrowers have the choice to finance these fees and not pay them out of pocket or pay them out of pocket at closing. Additionally interest accrues on the unpaid balance.
Origination Fee
You may pay an origination fee to compensate the reverse mortgage lender for processing your HECM loan. A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000. If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.
Mortgage Insurance Premium called MIP
The upfront MIP is paid to the FHA to insure the reverse mortgage. You can finance the MIP cost so that you do not have to pay it out of pocket.
- MIP on a HECM Standard is 2% of the appraised value of the home
- MIP on a HECM Saver is 0.01% of the appraised value of the home. (You pay less MIP on a HECM Saver)
The MIP guarantees that a borrower will receive the expected loan advances, even if something happens to the lender. It also ensures that if a borrower or their heirs choose to sell the home to repay the debt the total amount owed can not exceed the value of the home.
Closing Fees
Reverse mortgage closing fees are paid to third parties, not the lender, to close the loan. They included fees paid to appraise the property, title insurance, survey fees, inspections, recording fees, credit check (credit score does not determine eligibility, lenders run credit checks to verify liens) and other fees.
Servicing Fees
Service Fees or Escrow Fees on a reverse mortgage are paid to the lender or their agents to service the loan throughout the life of the HECM. Servicing a reverse mortgage loan includes such things as sending statements, disbursing loan proceeds, and making sure borrowers keep up with the tax and insurance requirements of the loan.
The fee is deducted at the beginning of the loan from the total amount of funds available to the borrower. Therefore the borrower does not pay out of pocket monthly to the lender.
Interest Rate
Just as with traditional loans a reverse mortgage loan accrues interest on the unpaid balance. The difference is that the accrued interest on a reverse mortgage is paid when the borrower no longer needs the home. Therefore the borrower has moved or died. Because no payment is being made (principle or interest) the loan amount is growing over the life of the loan.
The mortgage insurance premium guarantees that your heirs or estate (if they sell the home to pay the loan) will not be forced to pay more than the value of the home.
Interest Rate and Ongoing Mortgage Insurance
A FHA reverse mortgage loan is also charged an ongoing MIP of half a percentage point that is added onto the interest rate. Therefore if a borrower is quoted an interest rate of 5.1% the effective rate is 5.6%.