Have you heard that reverse mortgages are expensive?
I have heard that question throughout my 23-year career in reverse mortgages. It is a fair question, especially when you are carefully protecting your retirement savings and home equity.
But before we call any mortgage “expensive,” we need to compare it with something similar. A traditional forward mortgage requires monthly principal and interest payments. A reverse mortgage is built differently.
An FHA-insured reverse mortgage, also called a Home Equity Conversion Mortgage or HECM, is the only type of mortgage that allows you to remain in your home for the rest of your life without a required monthly mortgage payment, as long as you meet the loan responsibilities.
That unique benefit comes with a unique cost structure. In this article, I will explain those costs one bucket at a time so you can decide whether a reverse mortgage makes sense for your situation.
My goal is not to pressure you into a decision. My goal is to give you the facts, explain the tradeoffs, and help you make an informed choice.
First, how does a HECM reverse mortgage work?
With a HECM, you keep the title to your home. You borrow against your home equity, but you do not have to make required monthly principal and interest payments.
You may choose to make voluntary payments if you wish. Otherwise, interest is added to the loan balance over time.
The loan generally becomes due when the last borrower permanently leaves the home. It may also become due if you do not meet your responsibilities, such as paying property taxes and homeowners insurance.
You must continue to:
- Live in the home as your primary residence
- Pay your property taxes
- Pay your homeowners insurance
- Maintain the home
- Keep your name on the title
You can learn more about the basic structure in my explanation of how reverse mortgages work.
Now, let’s look at the three primary cost buckets.
Bucket 1: The upfront mortgage insurance premium
The first and most misunderstood cost is the upfront mortgage insurance premium.
For an FHA-insured HECM, this premium is 2% of the home’s value, up to the FHA lending limit. The lending limit discussed in my podcast is $1,249,000.
For example, if your home is worth $600,000, the initial mortgage insurance premium would be:
2% of $600,000 = $12,000
This money does not go to me or my company. It goes to FHA and into an insurance pool.
That insurance helps provide several important protections.
1. Guaranteed access to your available funds
The FHA insurance helps guarantee that you will continue to have access to the money available through your reverse mortgage. This can be especially important if you choose a line of credit or scheduled payments.
2. Non-recourse protection
A HECM includes non-recourse protection. This means that if the loan balance eventually becomes greater than the value of the home, you, your estate, and your heirs are not responsible for paying the difference.
For example, suppose the reverse mortgage balance is $600,000, but the home is worth only $500,000 when the loan becomes due. The $100,000 difference does not become a personal debt for your family.
The mortgage insurance helps protect the lender in that situation. Your heirs can sell the home or make other arrangements without being required to pay the shortfall from other assets.
You can read more about this protection in who owns the home with a reverse mortgage.
3. Access to HECM interest rates
Mortgage insurance also helps make the FHA-insured HECM structure possible at its interest rates.
In the episode, I discussed HECM rates in the 6% to 6.25% range, approximately three-quarters of a point below a conventional 30-year mortgage at that time. Proprietary reverse mortgages without FHA mortgage insurance may carry rates in the 9% range, and they do not provide the same guarantee of access to available funds.
So, is the upfront mortgage insurance premium a cost? Yes, it is.
But it is not simply money disappearing into a lender’s pocket. It helps pay for the protections that make the HECM different from other loans.
Bucket 2: The lender origination fee
The second bucket is the origination fee. This is the lender’s compensation for preparing and completing the loan.
Unlike some mortgage fees, the HECM origination fee is limited by HUD’s formula:
- 2% of the first $200,000 of the home’s value
- 1% of the value above $200,000
- A maximum of $6,000
For example, a $300,000 home could have a maximum origination fee of $5,000:
- 2% of the first $200,000 = $4,000
- 1% of the next $100,000 = $1,000
- Total = $5,000
A $400,000 home reaches the $6,000 maximum. Even if the home is worth $700,000, the maximum remains $6,000.
However, the maximum is a ceiling. It is not automatically what you must pay.
Depending on the loan and the amount you receive, I often reduce the origination fee. I also show you exactly what I am charging so you can review it before moving forward.
Transparency matters here. You should never have to guess what a lender is earning or what a fee represents.
Bucket 3: Third-party closing costs
The third bucket includes the other services required to complete a mortgage. These costs are paid to third-party providers, not kept by the lender.
They may include:
- Home appraisal
- Title insurance
- Settlement and closing services
- Credit report
- Recording fees
- Flood certification
- Other smaller closing charges
For the loans I handle, these costs are typically between $2,400 and $3,000, depending on the property and circumstances.
There can be additional costs in special situations. For example, if your home is held in a trust, an attorney may need to review the trust documents. A leased solar panel agreement may also require legal review.
The good news is that these costs are generally rolled into the loan rather than paid out of pocket at closing. Some lenders require borrowers to pay certain items in advance. I do not require you to prepay the appraisal and credit report simply to receive a quote.
For more detail, see what the closing costs are on a reverse mortgage.
The separate counseling cost
There is one important exception to the costs that are generally included in the loan: HUD-required independent counseling.
Before you sign the final loan documents, you must complete a counseling session with an independent, HUD-approved counselor. The counselor does not work for me or for the lender. The purpose is to make sure you understand:
- How the reverse mortgage works
- The costs involved
- Your responsibility to pay property taxes and insurance
- The requirement to maintain the home
- The primary residence requirement
- What happens to the loan when you permanently leave the home
Counseling usually costs between $150 and $200, although the fee may vary. In some need-based situations, the cost may be waived or rolled into the loan.
I strongly encourage you not to sign reverse mortgage documents before completing counseling. Counseling is there to protect you, not to create pressure.
I also recommend that you do not provide your Social Security number to multiple lenders just to receive a quote. A lender should be able to explain the basic numbers without pulling your credit simply to start a conversation.
You can read more in why reverse mortgages require a housing counselor.
The ongoing mortgage insurance charge
The upfront mortgage insurance premium is not the only mortgage insurance cost. A HECM also carries an ongoing mortgage insurance charge of 0.5% of the loan balance per year.
For example, if your loan balance is $100,000, the annual mortgage insurance charge would initially be about $500. Because the balance can grow over time, the amount may also increase.
Interest is also charged on the loan balance. If you do not make voluntary payments, the interest and mortgage insurance are added to the balance. That is one of the most important tradeoffs to understand.
A reverse mortgage can improve monthly cash flow because there is no required monthly mortgage payment. At the same time, the loan balance generally grows over time. I will show you an amortization schedule so you can see how that may affect your balance and remaining equity.
A note for Colorado veterans
There is no VA reverse mortgage. However, I am a veteran myself. I served in the U.S. Army from 1983 to 1986 and was stationed in Germany.
For any veteran who completes a reverse mortgage with me, I provide a lender credit for the appraisal and title insurance. The appraisal may cost approximately $650 to $750, and title insurance is typically around $900. Together, the benefit is roughly $1,500, depending on the actual charges.
This offer has no deadline and no “act now” requirement. You still complete counseling and follow the same process as every other borrower. The lender credit simply reflects my way of saying thank you for your service.
So, are reverse mortgages expensive?
A HECM reverse mortgage does have meaningful costs. The upfront mortgage insurance premium can be substantial, the origination fee is regulated but still significant, and third-party closing costs add to the total.
Most of these costs can be included in the loan, but that does not make them free. They use some of your home equity, and interest may accrue on them over time.
The better question is whether the costs are reasonable in light of the benefits you need.
For some homeowners, eliminating a required monthly mortgage payment may provide valuable breathing room in retirement. Others may appreciate the flexibility of a line of credit or the protection of non-recourse financing. For someone else, the costs may outweigh the benefits.
A reverse mortgage is not right for everyone. I am personally committed to explaining both the advantages and the limitations so you can decide without pressure.
If you would like to explore your options, I invite you to review our HECM reverse mortgage information or contact me directly. I will walk through the numbers, explain the responsibilities, and give you time to make an informed decision.
