How Much Does a Reverse Mortgage Cost?
If you have heard of reverse mortgages, you probably would be wondering what they cost. Are there too many upfront costs? And how do they compare with traditional mortgages?
These are all valid concerns, but there is really no need to worry too much about any large out-of-pocket expenses. The interest rates and origination costs associated with reverse mortgages are usually higher than traditional “forward” mortgages. However, most closing costs and fees can be rolled into the loan, meaning you don’t have to shell out any significant out-of-pocket money upfront.
Cost of Mandatory Counseling
Completing the mandatory counseling is usually the first cost homeowners incur. The cost will depend on the agency providing the service, with many charging around $125 and $250 per session, and some offering free counseling.
Counseling is a crucial step in taking out a reverse mortgage. The counselor will determine your ability to pay using factors such as your debt obligations, income, and more. Usually, the counseling fees are explained to you before the actual counseling so that you can decide whether you can afford it.
The Breakdown of Fees and Charges
- Origination cost: Lenders charge 2% on the first $200,000 of the value of your home. Also, there is a 1% charge of any amount over $200,000. However, the total origination cost does not exceed $6,000.
- Mortgage insurance premium (MIP): The initial MIP at closing is charged at 2%, with an annual MIP not exceeding 0.5% of the total loan balance. This fee does not need to be paid upfront, as it can be financed into the loan.
- Servicing fees: Depending on whether you choose a fixed-rate or adjustable-rate, the lender can charge a small monthly fee to maintain the reverse mortgage throughout the loan term. The fee does not exceed $35 for monthly adjustable rates and is capped at $30 for fixed-rates or loans with annually adjustable rates.
- Third-party fees: You may also incur some other charges from third parties that provide real estate services associated with the reverse mortgage. These charges may be for surveys, credit checks, recording fees, mortgage taxes, home inspection, home appraisal, title search, and title insurance.
Your credit score, the lender you choose, and interest rates can all affect the overall cost of a reverse mortgage. You can choose to pay these fees in cash or from the loan proceeds.
Choosing to pay from the reverse mortgage loan means you don’t have to bring any money to the closing. Instead, the fees are deducted from the total amount you qualify for before paying you whatever is left.
Ongoing Costs for a Reverse Mortgage
Home equity conversion mortgages (HECMs), which are the most common types of reverse mortgages, come with ongoing costs that are added to the balance of your loan at the end of every month for the life of the loan.
Borrowing only as much as you need is a great way to reduce ongoing costs because the higher your loan amount and the longer it stays, the more charges you will get in terms of ongoing costs.
- Interest rates
- Property charges (property taxes, homeowners insurance, flood insurance, and other applicable property fees
- Annual mortgage insurance premium (this is calculated at 0.5% of the outstanding loan balance)
- Servicing fees (this is paid to the lender for various costs, including making your loan proceeds available to you promptly, providing account statements, and ensuring that you stay up to date with the requirements of the loan
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