Fees are never fun. Although many lenders try to eliminate fees and other expenses where possible, many of these costs are essential or, in some cases, mandated by the federal government. In the interest of transparency, let’s explore some of the common rates and fees that you can expect throughout the reverse mortgage process.
Understanding the Mortgage Insurance Premium (MIP)
When taking out a reverse mortgage, you will need to pay a Mortgage Insurance Premium (MIP) at closing. Additionally, depending on the type of loan you receive, you will also be expected to pay an annual MIP throughout the life of the loan. At closing, the MIP will be calculated based on the lesser of the home’s appraised value or the current HECM loan limit (which is $625,500). In most cases, you will have to pay about 0.5%. Although it is not an upfront cost, keep in mind that you will also need to pay the annual MIP in future years. This will be charged at 1.25% of the current balance.
At this point you may be wondering: “What is the MIP used for?”
In order to maintain the reverse mortgage as a non-recourse loan, the Federal Housing Administration (FHA) must absorb the cost of the remaining loan balance if the sale of a borrower’s home does not cover the balance of the loan. Knowing that they will never have to pay any more than the value of the home allows many borrowers to worry less about paying back the debt. However, in order to uphold this deal, the FHA must collect some form of payment. Essentially, that’s the purpose behind the MIP.
These fees vary from lender to lender, but they are still capped by the FHA. To compensate the lender for processing your loan, you will be charged either $2,500 or 2% of the first $200,000 of your home’s value on top of 1% of the remaining amount past $200,000 at the lender’s discretion. However, homes that are worth $125,000 or less will be capped at $2,500. Keep in mind that, in accordance with current FHA regulations, an origination fee will never cost more than $6,000.
Lenders and their agents provide servicing throughout the entire duration of the loan. All home loans require servicing – HECMs are no exception. Sending updated account statements, billing, making sure that borrowers remain current on payments, disbursing loan proceeds, and checking in to see if a borrower is meeting tax and insurance requirements are all necessary components of the servicing. Servicing fees are usually pretty small – around $25-$35. If you have an adjustable rate HECM that adjusts annually, the fee will be no greater than $30 as per government regulations. Rates that adjust monthly will also be capped at $35. The first month’s servicing fee will be taken out at closing and future fees will need to be paid throughout the life of the loan. However, keep in mind that these days, servicing fees are less common.
For the most part, other costs associated with a reverse mortgage include many of the same things that accompany a conventional mortgage: appraisal fees, escrow costs, title fees, and similar expenses tend to remain constant between lenders. However, due to the FHA’s “no junk” policies, a HECM will only include legitimate fees and will protect borrowers from many of the extra fees some lenders would try to include.
HECM Interest Rates
While interest rates are still an important factor in all loans, they work a bit differently for reverse mortgages. A normal loan would require interest to be paid as part of regular mortgage payments, but for a reverse mortgage, interest won’t be relevant until the loan comes due and payable because no monthly mortgage payments are required (homeowners still pay property taxes and homeowners insurance and maintain the home). The interest is added to the loan balance, which is not due until the last borrower moves out of the home or passes away. When the loan comes due, the borrower or heirs will never owe more than the value of the property.
That said, if you’re still contemplating a reverse mortgage, differing interest rates may still play a substantial role in your decision. Thankfully, the United States Department of Housing & Urban Development publishes statistics on HECM originations every month. While rates are changing constantly, over the past three years they have hovered around 5.0% for fixed rate HECMs and vary between 2.5% to 5% for adjustable rate HECMs.
Hopefully, this information on rates and fees has provided you with a better understanding of the reverse mortgage process and the types of costs that accompany it. As the years go by and laws change, so do fees and related expenses. While these figures may not be identical around this time next year, they can still provide a benchmark for prospective borrowers in the near future.