Reverse mortgages are a useful tool in retirement, especially if you started investing late and don’t have as large of a nest egg as you’d like. But reverse mortgages also come with several fees that are important to consider before taking out the loan.
So how much does it cost to get a reverse mortgage, and how do they work? We’ll explore the full breadth of reverse mortgage fees below.
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What Is a Reverse Mortgage?
A reverse mortgage is a loan that homeowners who are 62 or older can get based on the equity they have in their home. Seniors can use this financial product to infuse their monthly budget with additional income, so they can enjoy retirement more and worry less about rising medical costs. Unlike a traditional mortgage, you don’t make monthly mortgage payments. The loan is repaid once you move from the home.
Reverse mortgages can be complicated—that’s why federally insured reverse mortgages, called home equity conversion mortgages (HECMs), require you to enroll in counseling to ensure you understand the process before moving forward.
You’ll need to know about the tax implications of reverse mortgages, HECM lending limits, and the different types of reverse mortgages available. You’ll also need to understand what happens to your home (and the loan) once you move or pass away—or if you miss property tax payments.
Just as importantly, you’ll need to understand all the reverse mortgage fees you’ll pay for such a loan.
Reverse Mortgage Costs and Fees
Reverse mortgage costs can add up quickly—there are quite a few of them. Reverse mortgages have upfront costs as well as ongoing fees that you’ll need to factor into your monthly budget.
Most seniors will take out a home equity conversion mortgage through the United States Department of Housing and Urban Development (HUD). These are federally insured and, as such, have the strictest regulations.
Common HECM reverse mortgage fees include:
- The cost of a HECM counseling session
- Origination fees
- Mortgage insurance premium (initial and annual)
- Loan servicing fees
- Third-party charges
The amount of each of these fees can vary because many are a percentage of your home’s value or the loan amount. The table below breaks down how these common reverse mortgage costs work:
|HECM counseling session||$125|
|Origination fee||2% of the loan amount upfront, plus 0.5% on outstanding balance annually|
|Loan servicing fees||Up to $30/month for fixed-rate loans; up to $35/month for variable-rate loans|
|Interest||Depends on current rate; can be fixed or variable|
|Third-party charges||Variable; may include appraisal fee, title fee, document preparation, notary fee, etc.|
Required HECM Counseling Session
Before taking out a HECM loan, potential borrowers must meet with a qualified reverse mortgage counselor to understand loan requirements, how it can impact their finances, and how it could impact spouses and next of kin when the borrower passes away. The counselor will also suggest alternatives to HECMs.On average, you’ll pay $125 for this session (that’s what the HUD recommends), but some agencies may charge a different fee—or no fee at all.
Many loan types—mortgages, auto loans, personal loans, and reverse mortgages—can have origination fees to start an application and process the loan.
The HUD strictly limits HECM origination fees to keep them reasonable; proprietary reverse mortgages have less oversight and can thus have higher origination fees.
When it comes to HECM origination fees, lenders can charge $2,500 or 2% of the first $200,000 financed (that’s $4,000 max) and then 0.5% of any additional loan amount over $200,000, up to a total origination fee of $6,000.
Mortgage Insurance Premium
If you purchased a house without putting down 20%, you likely paid private mortgage insurance (PMI). Similarly, reverse mortgages come with a mortgage insurance premium, financed as part of your loan.For a HECM, you’ll be hit with two mortgage insurance premiums:
- Initial mortgage insurance: An initial premium of 2% due at closing.
- Annual mortgage insurance: An annual mortgage insurance premium equal to 0.5% of your outstanding mortgage balance.
Loan Servicing Fee
Each month, you’ll pay the lender a fee to service your loan. This covers the cost of disbursing loan funds, sending account statements, and ensuring you’re current with all loan requirements.
Many lenders add a fee of $30 per month for a fixed-rate reverse mortgage or up to $35 per month for a variable-rate loan (Some lenders waive this fee, so ask always about applicable fees when researching reputable reverse mortgage lenders).
Like a traditional mortgage, reverse mortgages have an interest rate (either fixed or variable). Each month, interest adds to the amount you owe. But unlike a regular mortgage, you don’t make monthly payments on a reverse mortgage to lower the balance. Instead, because of monthly interest, your balance grows over time.
How much you’ll pay in interest depends on current rates when you take out your loan. If you choose a fixed-rate reverse mortgage, you may be limited to a lump sum payout. Variable-rate options allow you to use your reverse mortgage as a line of credit, but be careful: If interest rates go up, your total loan balance can grow quickly.
You’ll incur a number of different closing costs before your loan is funded. These might include title fees, inspections, appraisals, mortgage taxes, credit checks, and other fees. Because each loan is different, these costs can vary significantly.
How Much Money Can I Get From a Reverse Mortgage?
The amount of money you can get from a reverse mortgage depends on many factors. In general, borrowers can expect to qualify for a reverse mortgage worth between 40% and 60% of their home’s value.
Here are some factors that can impact how much you’ll actually be able to borrow:
- Home value: The appraised value of your home will directly impact your loan amount. Even if you have 100% equity in your home, lenders usually only offer loans between 40% and 60% of its value. The more valuable your home, the larger the loan amount could be—to a point.
- Lending limits: Each year, the Federal Housing Administration reviews and revises reverse mortgage lending limits for HECM loans to keep up with home price appreciation. For 2023, the high cost ceiling for a one-unit property is $1,089,300. Borrowers with more valuable homes who want a larger loan amount can consider jumbo reverse mortgages instead, but remember: These aren’t federally insured, so fees might be higher.
- Distributions: How you receive your funds impacts how much a lender will offer. If you elect for a lump sum payment, the amount you’re offered will typically be less than what you’d get if you choose an open line of credit or monthly installments from the lender.
- Mortgage owed: It’s possible to get a reverse mortgage even if you still owe money on your home. You’ll just have to pay off the current mortgage with the loan proceeds from your reverse mortgage, which diminishes the total loan amount you pocket.
- Current interest rates: When rates are low, lenders are more likely to grant you a larger loan amount. As interest rates rise, they might be more conservative with how much they offer.
- Closing costs: Instead of paying out of pocket, the lender will deduct the closing costs from your loan amount, which means the total funds you receive will be less than the amount you actually borrow.
Jumbo Reverse Mortgage Costs
Proprietary reverse mortgages, also known as jumbo reverse mortgages, are not federally insured, so homeowners may be able to get larger loan amounts—but interest rates and fees are higher since there are fewer reverse mortgage regulations when homeowners go this route. Single-purpose reverse mortgages have fewer fees, but these are less common.
Like traditional reverse mortgages, jumbo reverse mortgages include origination fees, interest, and closing costs. However, jumbo loans do not charge mortgage insurance premiums. This means you’ll save what would have been an upfront charge of 2% of the loan amount and an annual charge of 0.5% of the loan amount if you had gotten a traditional reverse mortgage.
Reverse mortgages can be a helpful tool if you need more income during retirement. Before applying for one, however, it’s important to understand how you’ll repay it and what will happen to your home if you pass away. Just as importantly, fully analyze the reverse mortgage fees you’ll pay to make sure it’s worth the cost.
If a reverse mortgage sounds like the best path forward, check out our ranking of the best reverse mortgage lenders to start your search.