Borrowers who don’t understand the different closing costs associated with a reverse mortgage loan may be blindsided by the final amount, which can tend to be higher, on average, than fees associated with conventional mortgages. Understanding these fees–and why the Federal Housing Administration insists on them–will make your reverse mortgage process smoother.
Reverse mortgage closing costs can be divided into four categories: the Upfront MIP (Mortgage Insurance Premium), the Origination Fee, Servicing Fees, and Other Costs.
The Upfront MIP, or Mortgage Insurance Premium, is paid by the borrower to the FHA for loan insurance. The MIP is in your best interest, as it makes the mortgage a non-recourse loan. If the balance of the loan ever exceeds the property value, neither you nor your heirs have to cover the difference. Knowing this allows borrowers to access loan funds with peace of mind.
The origination fee is paid to the lender for originating and processing the loan. The FHA has strict guidelines on the maximum and minimum cost of the Origination Fee.
The fee amounts to two percent of the first $200,000 in home value, plus one percent of any value in excess of $200,000. The FHA caps Origination Fees at $6,000–no matter how much your home is worth, the fee will never be any higher than this amount.
Origination fees also have a minimum “floor” amount of $2,500, regardless of the home’s worth.
Borrowers see the Servicing Fee as a closing cost, but that isn’t exactly true. The money for this fee is set aside from the loan amount at closing and is used to pay the monthly cost of maintaining the loan. The Servicing Fee is paid directly to the lender. When the loan comes due, any amount remaining in the money set aside is credited to your equity.
Other costs associated with a reverse mortgage are, for the most part, the same as those paid when closing a conventional mortgage: appraisal fees, title fees, escrow costs, and similar fees. These costs tend to remain constant from lender to lender. Thanks to the FHA’s “no junk” policy, an FHA loan only includes legitimate fees, protecting borrowers from extra fees lenders may sometimes charge to gouge consumers.
Taken together, the closing fees for a reverse mortgage are higher than for a conventional mortgage. In return, however, you get the relief of no more monthly mortgage payments* and the opportunity to use your property’s equity as you see fit.
Got questions about reverse mortgage closing costs? Call one of our licensed experts at (800) 401-8114.
*Homeowner is still responsible for taxes, insurance and property maintenance.