A question that comes up when older adults are researching a Home Equity Conversion Mortgage (HECM) is, ‘What are the fees associated with the loan?’ And, maybe more important is what are the upfront fees versus what you pay over the life of the loan.
A benefit with HECMs is that their up-front costs can be financed into the loan, keeping in mind interest will accrue on these fees over time if you proceed with this option. What if you are planning to move in a year or two? The closing costs associated with a standard reverse mortgage may outweigh the benefit, but a better fit may be the HECM for Purchase which allows borrowers to sell their home and finance a new one with a reverse mortgage.
There are three upfront fees borrowers are required to pay with a HECM.
What is the Origination Fee?
Mortgage lenders charge a loan origination fee, and this is what they earn on the loan. To protect borrowers from being charged an unfair amount, there are maximums imposed by the government. The fees are based on a percentage of the value of your home.
The FHA uses a formula to determine what the lender can charge. The formula is:1
- 2% of the first $200,000 of the property’s value and 1% of the amount over $200,000
- A maximum of a $6,000 origination fee
- A lender can charge a HECM origination fee of up to $2,500 if your home is valued at less than $125,000
What is Initial Mortgage Insurance Premium (MIP)?
HECMs are insured by the Federal Housing Administration (FHA)2 and the MIP is paid to the government in exchange for insurance on the HECM loan. FHA insurance covers both the borrower and the lender. If the lender goes out of business, the government will ensure you still have access to your full principal limit. If your home value cannot cover your loan balance when the loan becomes due, the government makes up the difference to the lender.
The initial MIP is 2% of your home’s value.3
What are Closing Costs?
The standard closing costs for a HECM are like that of a conventional mortgage. They include appraisal fees, credit checks, and the costs of any additional items added to your loan. Title fees and tax documentation are two typical examples.
If you are considering a HECM and have questions about closing costs, call 1-800-976-6211 to speak to a licensed loan advisor.
Disclosures:
1 https://reversemortgageguides.org/reverse-mortgage/fees/
2 As required by the Federal Housing Administration (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.
3https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou#:~:text=You%20will%20be%20charged%20an,of%20the%20outstanding%20mortgage%20balance.&text=You%20will%20incur%20a%20cost%20for%20FHA%20mortgage%20insurance.