Understanding the Full Cost Of Reverse Mortgage Loans
The Housing and Community Development Act of 1987 created a new housing program specifically for seniors called a home equity conversion mortgage (HECM). It also gave the program’s administration and oversight to the Federal Housing Administration under HUD.
Since then, over 1.3 million Americans have leveraged the program to offset retirement expenses like daily living costs or home modifications to age in place.
These mortgages don’t have ongoing monthly payments, so people started referring to them as reverse mortgages. And, while you don’t have to pay the loan down unless you move, sell, or pass away, there are costs you should be aware of to see if a reverse mortgage is right for your situation. This article covers what you can expect for initial costs and the ongoing cost of this type of loan.
How reverse mortgages work
Before we cover the costs, here are a few key details about reverse mortgages that impact your cost considerations:
- This loan pulls against your home equity and all of the reverse mortgage fees we cover below get added to your loan balance and reduce your available equity.
- There are three reverse mortgage loan types: HECM, proprietary reverse mortgages, and single-purpose reverse mortgages. HECM is the most common and the focus of our cost discussion here.
- You can choose to receive your loan as one lump sum, regular payments, a home equity line of credit, or a combination.
Upfront costs for reverse mortgages
When you close on a reverse mortgage, your “upfront costs” aren’t actually costs you have to pay at closing. Instead, they get rolled into the loan balance and increase your loan amount.
Origination fee
This fee covers the reverse mortgage lender’s administrative costs to process and underwrite your loan. The FHA caps the origination fee at $6,000, but your amount might be less depending on your loan.
The agency allows the lender to charge the highest amount of either $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000.
Upfront mortgage insurance premiums
Mortgage insurance, often referred to as MIP, goes into a fund to cover the costs of insuring your reverse mortgage. The FHA’s standard fee for this is 2% of the maximum amount you can borrow. This amount is also called the claim amount, and the max is either your home’s appraised value or the FHA lending limit, which is $1,149,825 for 2024.
So, if your claim amount is $200,000, your initial mortgage insurance premium is $4,000.
Appraisal fee
To see how much equity your home has, the lender orders an appraisal to assess property value. The higher the appraisal, the more you can borrow. These appraisal fees can range from $400 to $600.
Reverse mortgage counseling
A requirement for getting home equity conversion mortgages is to participate in a counseling session with a HUD-certified advisor, which can cost between $150 and $200.
Closing costs
Your reverse mortgage costs also include closing fees like:
- Credit report: The lender also goes through credit checks to see if you have any outstanding debt. They also want to see if you can afford ongoing costs like insurance premiums, property taxes, and home maintenance.
- Lender title insurance: Your reverse mortgage lender charges a fee for title insurance premiums. This covers making sure you receive the correct loan proceeds and protects you from any title issues that might come up.
- Lien recording: This fee covers the cost of recording the new mortgage lien with your local county recorder’s office.
- Notary: Just like a traditional mortgage, closing requires a notary to confirm the authenticity of the documents and verify you are the actual borrower.
Summary of Upfront Costs
| Fee Type | Amount/Range | When Paid |
|---|---|---|
| Origination Fee | Up to $6,000 or 2% of the first $200,000 + 1% of the amount over $200,000 | At loan origination (added to balance) |
| Upfront Mortgage Insurance Premium (MIP) | 2% of the maximum claim amount | At loan origination (added to balance) |
| Appraisal Fee | $400 to $600 | At loan origination (added to balance) |
| Counseling Session | $150 to $200 | Prior to loan approval |
| Closing Costs | Varies (Credit Report, Title Insurance, Notary, Recording fees) | At loan origination (added to balance) |
| Annual Mortgage Insurance Premium (MIP) | 0.5% of the outstanding loan balance | Annually (added to the loan balance) |
| Interest Charges | Depends on loan option (fixed or variable rate) | Annually (added to the loan balance) |
| Servicing Fees | Up to $35/month | Monthly (added to loan balance) |
| Homeownership Costs | Varies (HOA fees, taxes, insurance, maintenance) | Ongoing |
Ongoing costs of reverse mortgage loans
Once you’ve closed on your reverse mortgage loan, you’ll also have ongoing annual costs, which include:
Interest charges
If you choose a lump sum payment for your loan, you’ll have a fixed-interest rate mortgage. If you choose any other payout option, your loan interest rates are variable and might change monthly or annually depending on the market.
For variable loans, HUD follows the Chicago Mercantile Exchange (CME) Term Secured Overnight Financing Rate (SOFR) index for your base rate. From there, the lender adds a margin of up to 5 points.
Whatever interest schedule type you choose, the lender adds these charges to your loan balance and defers them until the loan is due.
Annual mortgage insurance premium
Your annual MIP is 0.5% of your outstanding reverse mortgage balance. Using the same $200,000 claim example, your annual mortgage insurance premiums would be $1,000.
Servicing fees
Your lender may also charge a servicing fee of up to $35 per month for costs like:
- Administering your loan.
- Providing outstanding mortgage balance statements.
- Confirming you are current on property taxes and insurance premiums.
Homeownership costs
You’ll also have ongoing homeownership costs like HOA fees, repairs, maintenance, taxes, and insurance. If you default on any of these, it could result in foreclosure of the reverse mortgage loan.
Reverse mortgage costs final thoughts
Even though most of the costs for a reverse mortgage loan get added to the loan balance, you should still evaluate options to make the best choice for your situation. Every charge adds to your mortgage balance and impacts the total amount you owe. It’s worth taking the time to compare rates and fees to reduce your costs and make the most of your reverse mortgage.
You can get an idea of your potential loan amount and costs by using our reverse mortgage calculator below:
Cost of a reverse mortgage: FAQs
What is the 60% rule for reverse mortgages?
This FHA rule states that the maximum amount you can borrow for a HECM loan is 60% of your home’s appraised value.
What are the hidden costs of a reverse mortgage?
Some of the costs to be aware of include the loan origination fee, mortgage insurance premium (MIP), and ongoing loan servicing fees.
What is the current interest rate on a reverse mortgage?
The current interest rate uses the Chicago Mercantile Exchange (CME) Term Secured Overnight Financing Rate (SOFR) index as the base rate. Your lender adds additional points for margin, and the total gets rounded to the nearest 1/8 of a percent.