March 12, 2016 by HECM Pro
One of the big HECM reverse mortgage disadvantages you may hear in the news media or read about online is the high fees. Yes, the fees can be high, but it doesn’t mean they always are. As with many things reported on in the media, there’s a little more nuance to the issue than the headlines would imply.
What Are the Fees to Get a Reverse Mortgage?
Like any mortgage product, there are closing costs that have to be paid to get the loan. Whether the fees are stiff or not, the good news is that most or all of them can be rolled into the new loan amount, so they don’t have to be paid out of pocket.
Reverse mortgage fees generally fall into three categories:
- 3rd party closing costs. These are the services the lender has to hire out to get the reverse mortgage done, including title insurance, escrow services, appraisal, etc. A lender is not allowed to mark up 3rd party closing costs; only the cost incurred can be passed on to the borrower.
- Origination. This is the lender’s fee for originating the reverse mortgage and it is often calculated based on home value. In other words, the higher the home value, the higher the fee, up to a maximum of $6,000 per FHA guidelines. Reverse mortgage borrowers often can negotiate this fee with the lender.
- IMIP. This is a fee charged by FHA to insure the HECM reverse mortgage and protect the lender and borrower if there’s not enough value in the home to pay back the reverse mortgage in the future. As with 3rd party closing costs, the lender cannot mark up this fee. Depending on how much is initially borrowed, this fee could be 0.5% or 2.5% of the appraised value (up to 2.50% of the FHA reverse mortgage lending limit).
If your home is worth a few hundred thousand or less and you owe little to nothing on it, the fees likely will be comparable or a little higher than what you would find on a traditional home loan. However, if your home value is worth more and you have a large mortgage balance, the fees could be pretty steep because you could fall under the higher IMIP rate of 2.50% of the appraised value.
As an example, let’s assume we’re working with a 75-year old single man who has a free and clear home in Texas worth $115,000. According to our reverse mortgage calculator, he would be able to access $64,735 in the form of cash or a line of credit (based on interest rates at time of publishing). His closing costs might look something like the following:
- IMIP: $575
- Origination: $2,500
- 3rd party costs: $2,800
For this kind of initial loan amount in Texas, these closing costs could be very comparable to a traditional forward mortgage.
As another example, let’s assume we’re working with a single 81-year old woman in Utah who has a home worth $375,000 and a mortgage balance of $175,000. The reverse mortgage calculator shows that she can completely eliminate her mortgage payment (which saves her around $1,000/month) and access an additional $58,450 in the form of a line or credit or lump sum in cash. Her closing costs might look something like the following:
- IMIP: $9,375
- Origination: $3,750
- 3rd party closing costs: $2,800
The biggest reason her total costs are so much higher is because she’s paying off a large mortgage balance and falls under the higher IMIP rate (2.50% of the home value). FHA charges much more for the IMIP because there’s a higher risk she could owe more on the home than it’s worth in the future, which means FHA could have to settle part of the loan balance out of the mortgage insurance fund.
The Right Perspective
As we’ve seen, yes, fees can be pretty stiff for a reverse mortgage depending on the scenario in question. However, they can be for forward mortgages as well. As of this writing, FHA charges a standard 1.75% of the loan amount for upfront mortgage insurance when you purchase a home using a traditional FHA loan. If you’re purchasing a $250,000 home, that’s $4,266 (assuming a minimum down payment of 3.50%) that has to be paid in addition to any other closing costs, such as title insurance, escrow, gov’t recording, prepaid interest, origination, etc.
Funding fees for VA mortgages can run as high as 3.30% of the loan amount for certain refinance scenarios (in addition to any other closing costs).
As with anything, it’s always important to look at cost versus benefit. If you’re retired and have 28 years to go on your mortgage, what’s really more expensive? An IMIP fee (that you typically don’t have to pay out of pocket) or having to limit your lifestyle because of a large mortgage payment that you’ll likely be making until you die?
As with any financial tool, it’s important to evaluate both costs and benefits. If the costs are high but the benefits much higher, it can still make a ton of sense to move forward.
You Can Negotiate Reverse Mortgage Fees
Depending on the lender you’re working with, the current interest rate environment, and the initial loan amount you’re working with, you may have some room to negotiate fees with your lender. This is especially true if you’re starting out with a pretty substantial loan amount that will generate a good amount of interest for the lender over time. There’s no guarantee that the lender will cut fees, but you never know unless you ask, right?
How Much the Fees Are Depends on the Scenario
As we’ve shown, the fees for a reverse mortgage can be expensive, but it doesn’t mean they always are – it just depends on the scenario. If the home value is a few hundred thousand or less and you have little or no mortgage balance, the fees are very reasonable to many forward mortgage products. If you have a high home value and a high mortgage balance, the fees can be stiff, but you might be able to negotiate the fees down substantially.
Whatever the reverse mortgage fees are, most or all of them can usually be rolled into the new loan amount, so you won’t need to pay them out of your pocket.