When I am asked what it costs to get a reverse mortgage, I answer with my most common response: It depends.
I don’t answer this way to be evasive, but everyone’s situation is different and there are several factors that determine the costs of a reverse mortgage.
What type of loan you choose, how much money you take out upfront, the interest rate you choose, and many others.
Before we continue, I want you to notice the title of this article. I specifically did not say “What does it cost to get a reverse mortgage?”
In this article I want to focus on the costs of the FHA insured reverse mortgage program called the Home Equity Conversion Mortgage, (HECM).
This is the most popular reverse mortgage program, and the most expensive, (we’ll get to the reason for this later). Even though it is the costliest,
it is the most versatile and offers the most access to your equity. That’s why it is the most popular.
Side Note – In the interest of not extending this article any longer than it needs to be, I am not going to be discussing the basics of reverse mortgages. You can learn how reverse mortgages work by visiting my FAQ page or my Reverse Mortgage Facts page.
Here is the more direct answer the question. The closing costs on a HECM loan can be broken down into three categories:
- Initial Mortgage Insurance Premium (IMIP)
- Origination Fee
- Other Closing Costs (such as appraisal, title insurance, credit report, etc…)
- Ongoing Costs (Interest and MIP)
Initial Mortgage Insurance Premium (IMIP) is charged on all HECM loans. In fact, it’s charged on all FHA insured loans, forward
and reverse. However, the cost of the IMIP on reverse mortgages is based on the value of the home, not the loan amount, as it is with
a regular, forward FHA loan. The IMIP cost for a HECM is 2.00% of the value of the home.
For example, if you have a home that is appraised for $300,000, the IMIP will be $6,000 (300,000 x 0.02). This 2% rule is applied on all HECM loans up
to a maximum value of $726,525. This is called the “Maximum Claim Amount” because any value above this figure will not be considered in the calculation
of the loan amount.
Origination Fee is the fee that goes to the lender/broker who is origination the loan for you. There is a formula for this as well.
The origination fee is calculated by charging 2.0% of the value of the home on the first $200,000 in value and 1.0% thereafter up to a maximum fee
of $6,000. There is also a minimum fee allowed of $2,500. Lenders and brokers are allowed to charge less.
For example, if you have a $300,000 you could be charged 2.0% on the first $200,000 in value (200,000 x 0.02 = $4,000) and 1.0% on the remaining $100,000
(100,000 x 0.01 = $1,000). The maximum origination fee you can be charged on a $300,000 valued home is $5,000. If your home is valued at
$400,000 or more, you can be charged no more than $6,000.
If you have a $100,000 home, 2.0% of this is $2,000. However, lenders are allowed to charge a minimum origination fee of $2,500.
Please note that, unlike the IMIP, these fees are negotiable. The lender/broker may or may not be willing to negotiate with you. It depends
on the loan amount, the interest rate (the higher the interest rate, the lower the fees, maybe), the company policies, etc…
Other Closing Costs are typically what I call “pass through fees”. These are fees we pay to other people to get your loan processed.
These fees include appraisal fee, title insurance, closing fee, credit report, flood certification, recording, as well as a few others. They
typically will total somewhere between $2,000 – $2,400 depending on the size of the loan or if your home is in a trust.
Some lenders may add “junk fees” which add to the profit of the company such as processing fees or documentation fees. However, sometimes these may
look like junk fees, but if a lender uses a third- party processor this may be a legitimate fee. For most HECM loans, we must pay an actual third-party
company to prepare our final closing documents and they charge us $175. So, in my case, this is not a junk fee that my company is pocketing.
Keep an eye on these fees when reviewing a quote from a reverse mortgage lender. If they seem excessive, even if they are legitimate fees, you may
be able to use it as leverage to get the lender to reduce the origination fee.
Ongoing Costs are the interest and mortgage insurance that you are charged every month you have the HECM in place. These costs don’t
really fit in with the title of this article because they are not costs to get the loan. But I wanted to address them here because they
are something to consider when weighing whether or not to get a reverse mortgage.
Once the reverse mortgage is in place, you will receive a monthly statement. These statements will always have at least two charges on them.
One is the amount of interest you were charged last month and the other is the amount of mortgage insurance.
You might be saying to yourself “Wait! I already paid mortgage insurance as part of the closing costs.”
Actually you didn’t pay anything. You were charged it, but most people never actually pay anything on the reverse mortgage until
they move and sell the home. If you were to pass away while you still have the reverse mortgage, you would technically never pay a penny.
This may seem trivial, but it differentiates the reverse mortgage from a normal forward mortgage because you do actually pay 100% of all the costs
as part of your monthly payment when you have a forward mortgage. But you don’t actually pay anything with a reverse mortgage.
Sorry for the rant, but I think it’s an important distinction. You are charged mortgage insurance as part of the closing costs. That
fee is called the Initial Mortgage Insurance Premium. The fee for this is 2.0% of the value of the home up to the maximum claim
amount. Once you have the reverse mortgage in place, you are charged an ongoing mortgage insurance premium simply called MIP. This fee
is one-half of one-percent (0.005) of the loan balance.
The MIP is charged monthly. For example if you have a loan balance of $100,000, the annual MIP at the rate of 0.005 is $500.00. We divide
this by 12 to arrive at the monthly fee of $41.67.
The interest is calculated the same way. On a $100,000 loan balance, if your interest rate is 4.50%, the annual interest charge would be $4,500.00.
We divide this figure by 12 to arrive at a monthly interest charge of $375.00.
You need to be aware that the interest and MIP are compounded monthly. This means that after the first month, on a $100,000 loan balance, you were
charged $375 in interest and $41.67 in MIP Your loan balance after the first month grew from $100,000 to $100,416.67. This is the new amount
you will be charged interest and MIP on for the next month.
I always make sure to be as clear as possible about the compounding interest and MIP with everyone I speak to so you can make an informed decision if this
is the right loan for you.
As always, please feel free to contact me directly at 303-467-7821 or e-mail me at bruce@almortgageinc.com with any questions.
