Reverse Mortgage Closing Costs

Reverse Mortgages involve many of the same closing costs that you would pay for a home purchase or a refinance. Here is a breakdown of the typical closing costs for a reverse mortgage:

Origination fee

This covers the operating/overhead expenses for the lender. A portion of this is also paid to the loan originator. Under the HECM (Home Equity Conversion Mortgage), which accounts for the majority of reverse mortgages, the origination fee is as follows:

2% of the lesser of the property's appraised value or the FHA maximum loan limit for your county. In most major metropolitan areas,the FHA max loan limit is $362,790. So if your home was appraised at $400,000, the origination fee would be 2% of $362,790 or $7256. The minimum origination fee is $2000.

Mortgage Insurance Premium

The mortgage insurance premium is calculated the same as the origination fee.

With a reverse mortgage, the lender recovers their principal, plus interest, when the home is sold or refinanced. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are not enough to pay off the loan, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

Appraisal fee

The appraisal fee is typically $325-$350. This is the only fee that is paid "up front". The appraiser will expect to be paid at the time of the property inspection.

Other closing costs

Credit report fee (while credit score is not an issue, credit is checked to verify there are no federal liens which would need to be paid)

Title Insurance (.00575 X the loan amount)

Costs incurred by the title company for title searches and document preparation.

State tax stamps on deed (.0035 X the loan amount)

County tax stamps (.002 X the loan amount)

Recording fee - fee charged to record the mortgage with the County Recorder's office. This is usually about $150

Service fee set aside

The service fee is a monthly charge fee paid to the company that services the mortgage. This is deducted from the available loan proceeds to cover the projected costs of servicing the account, but is not an actual charge. The servicing fee is actually charged on a monthly basis in the range of $25-35 per month.

As you can see, closing costs can be quite steep.(These do not have to be paid out of pocket - they are deducted from the loan proceeds) So, if you will be living in the home less than 3-5 years, it usually does not make sense to consider a reverse mortgage.