How Much Does a Reverse Mortgage Cost?

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A reverse mortgage provides an older homeowner with the opportunity to tap into their home’s equity in exchange for cash while not being required to make mortgage payments. But that opportunity comes at a price.

So, how much does a reverse mortgage cost? From the loan origination fee and appraisal fee to mortgage insurance and interest charges, a reverse mortgage may cost thousands of dollars.

How Much a Reverse Mortgage Costs

A reverse mortgage enables a homeowner, typically someone at least 62 years old, to borrow money based on their home equity—the difference between the value of their home and the amount still owed on their existing mortgage. The borrower might receive that money through a lump-sum payment, monthly payments, or a line of credit.

This type of loan pays off the original mortgage, if that mortgage isn’t already paid off, with the rest of the available money going to the borrower.

Generally, the reverse mortgage must be paid back when a borrower permanently moves out of their home or dies.

Anyone thinking about getting a reverse mortgage should be aware that it involves both upfront costs and ongoing costs, such as the loan origination fee to loan servicing fees.

Upfront Costs

  • Counseling fee: If a homeowner takes out a reverse mortgage through the federally backed and commonly used Home Equity Conversion Mortgage (HECM) program, they must take part in counseling from an agency endorsed by the U.S. Department of Housing and Urban Development (HUD). Fees range from $125 to $200.
  • Loan origination fee: If the reverse mortgage is an HECM loan, the origination fee cannot exceed $6,000. This fee is either $2,500 or 2% of the first $200,000 of a home’s value plus 1% of the amount over $200,000, whichever sum is greater.
  • Mortgage insurance premium: If the mortgage is an HECM loan, the initial mortgage insurance premium (MIP) is 2% of the loan amount. This premium is charged by the lender and paid to the Federal Housing Administration (FHA).
  • Closing costs. These costs cover things like the credit checks, home appraisal, property inspection, and title insurance. These will vary by lender and service provider, but can be several thousand dollars.

Ongoing Costs

  • Interest charges: Monthly interest charges can add up over the life of the loan. Interest normally accrues on both the principal of the reverse mortgage and the interest that already has been tacked on. However, the principal and interest generally aren’t due until the borrower dies or permanently moves out of the home.
  • Loan servicing fees: The borrower typically must pay loan servicing fees, either $30 or $35 a month, for the lender or lender’s representative to manage the loan.
  • Mortgage insurance premium: After the borrower covers the initial MIP, the borrower must pay an annual MIP representing 0.5% of the remaining loan balance. Again, this applies only to HECM loans. Mortgage insurance can cover the gap between the loan balance and the market value when the home is sold, or it can protect the borrower’s loan payouts in case the lender runs into financial trouble. 
  • Property taxes and home insurance premiums. If a borrower obtains an HECM loan, they must keep up with their property taxes and home insurance premiums.
  • Maintenance expenses. Since the borrower, not the lender, owns a home used as collateral for a reverse mortgage, the homeowner is responsible for covering maintenance expenses. In 2022, the average U.S. homeowner spent $2,467 on home maintenance, such as lawn care and interior painting, according to the Angi home improvement marketplace.

One of the main costs associated with a reverse mortgage is the mortgage insurance premium. The upfront premium is 2% for a federally backed reverse mortgage. In addition, the borrower is charged an annual MIP that adds up to 0.5% of the outstanding mortgage balance.

How HECM Reverse Mortgage Payouts Are Calculated

Various factors determine the payout amount of a reverse mortgage, including the age of the youngest borrower, the home’s market value, and current interest rates. Generally, the payout will be higher if the homeowner is older, the market value is higher, or the interest rates are lower, according to the New York State Department of Financial Services.

Once the payout amount is figured out, the borrower normally receives the loan proceeds in the form of a lump-sum payment, monthly payments, or a line of credit.

Factors That Affect Payout Amount

  • Age of the borrower: For an HECM reverse mortgage, the borrower must be at least 62 years old. Proprietary reverse mortgages that aren’t backed by the government can allow younger borrowers.
  • Appraised home value: The home’s appraised value contributes to the calculation of an HECM reverse mortgage payout.
  • Current interest rates: The interest rate for the loan also helps dictate how much the HECM payout is.

The FHA calculates the amount you can borrow using tables that reference your age and the interest rate to find the principal limit factor. This determines the percentage of the equity you have in your home that you can borrow with a reverse mortgage—the principal limit. This will always be less than the actual equity of your home. 

Payout Options

  • Lump-sum payment: This is one of the three primary payout options for an HECM reverse mortgage. A benefit of this payout option is that the borrower receives the money all at once. However, taking a lump-sum payment could result in paying more interest and fees over time than with a monthly payout or line of credit. That’s because the borrower starts accruing interest and fees on the full payout they receive when the loan closes.
  • Monthly payments: Monthly payouts can provide a long-term stream of income. An advantage to this payout option is that the borrower pays interest and fees only on the sum of money withdrawn up to that point. Of course, a disadvantage is that there’s no upfront access to a big chunk of money.
  • Line of credit: A line of credit offers some financial flexibility. That’s because a homeowner can borrow a portion of the available money and leave the rest for future needs. One benefit of a line of credit is that the borrower pays interest and fees only on the amount of money that’s been withdrawn.

A federally backed reverse mortgage charges either a fixed or variable interest rate. At the outset of the loan, a variable rate is usually lower than a fixed rate. But depending on market conditions, either a fixed rate or a variable rate might wind up triggering lower interest charges in the long run.

Understanding the Impact of Costs on Reverse Mortgages

An HECM reverse mortgage isn’t the only way to tap into home equity. Two alternatives are a home equity loan and a home equity line of credit (HELOC).

The costs of a HECM loan aren’t necessarily the same as the costs of a home equity loan or HELOC. Here are three examples:

  1. A reverse mortgage can begin accruing interest charges on a lump-sum payout once the loan closes (unless the borrower chooses a line of credit). But with a HELOC, a borrower pays interest only on the money that’s been borrowed so far, and not the full amount of money available to borrow.
  2. Many reverse mortgages charge a variable interest rate, meaning the rate can go up or down over time. By contrast, the interest rate on a home equity loan usually is fixed, meaning the total interest charges could end up being lower than they are for a reverse mortgage.
  3. An HECM borrower must pay for mortgage insurance upfront and throughout the life of the loan. On the other hand, a HELOC might enable a homeowner to avoid paying for mortgage insurance.

Compare the Best Reverse Mortgage Companies

Reverse Mortgage Company Minimum Age Upfront Costs NRMLA Member
American Advisors Group (AAG) 62 $6,000–$8,000 Yes
Liberty Reverse Mortgage 62 $5,000–$19,000 Yes
Longbridge Financial 62 $4,000–$8,000 Yes
Finance of America Reverse 55 Varies by product Yes
Members of the National Mortgage Lenders Association (NRMLA) adhere to a code of conduct.

How Can You Reduce the Costs Associated With an HECM Reverse Mortgage?

One way to reduce the costs associated with an HECM reverse mortgage is by comparing interest rates offered and fees charged by different lenders. Also, resist a salesperson’s pleas to buy other financial products or services that supposedly would complement a reverse mortgage.

Can You Use the Funds From an HECM Reverse Mortgage for Anything?

You can spend funds from an HECM reverse mortgage any way you’d like. For example, you might use all or some of the money to wipe out credit card debt, pay for future long-term care, update your home, or cover a grandchild’s college tuition.

What Happens to the Remaining Equity in Your Home After the Loan is Repaid?

When the borrower sells the home, they can keep any home equity that’s left. If the borrower dies and their reverse mortgage is then paid off, any remaining home equity would belong to the borrower’s heirs.

Do You Pay a Monthly Fee for a Reverse Mortgage?

A reverse mortgage typically comes with a monthly loan servicing fee, which a lender or their representative charges to manage the mortgage account. This fee might be $30 or $35, depending on whether the interest rate resets annually or monthly.

Article Sources
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