There are three large closing costs for a reverse mortgage which are the FHA mortgage insurance, title insurance and the origination fee. Two costs that are most often paid out of pocket instead of being financed are counseling and the appraisal.
FHA mortgage insurance
FHA insurance provides the following guarantees
- The homeowner can not “outlive” the reverse mortgage
- The homeowner and heirs will not be liable if the balance of the loan exceeds the value of the home
- The FHA will take over the loan if the lender becomes financially troubled
The upfront insurance premium is 2% of the property value up to the HUD property value limit.
Title fees
Title makes sure that the homeowner’s legal ownership of the property and is actually required for all mortgages, not just a reverse. Title insurance is the biggest part of title fees, the rest are broken down into:
- Title insurance
- Title settlement
- Title search/exam
- Recording
- Delivery/courier
- Payoff (if the mortgage is being paid off)
- Notary
- Doc prep
Origination fee
The origination fee is what the reverse mortgage lender makes on the reverse mortgage. The FHA determines what the lender can charge with the following statistics:
- 2% of the first $200,000 of the property value and 1% of the second $200,000 property value
- An absolute maximum of $6,000
- A floor of $2,500
Appraisal
Since a reverse mortgage appraisal is different and must be conducted by an FHA approved appraiser and follows specific FHA guidelines that require more documentation. An average FHA appraisal can be anywhere between $475 and $550 depending on the state. If you are in a remote location or have a property with unique circumstances, that can also drive up the cost.
Other closing costs
- Credit report
- Flood cert
- Counseling
- Wire fee
Interest
Like a traditional mortgage, a reverse mortgage does gather interest; however the homeowner is not making payments each month to reduce the loan balance. It results in the loan balance growing until the homeowner permanently moves out of the property or passes away.
Almost seventy percent of reverse mortgage holders have an adjustable rate reverse mortgage because the rate is usually lower than the fixed rate. Since homeowners do not make monthly payments, they are not concerned about the possible future change in the interest rate.
Interest rate and mortgage insurance
Recently, the interest rate on a reverse mortgage has been between 3% and 5%. The real interest rate is one half of a percentage point above the quoted rate because the total rate includes the FHA’s ongoing insurance premium.