Closing costs for a HECM reverse mortgage are charged to cover services necessary to complete the loan. Closing costs for a reverse mortgage are typically lumped into three categories: IMIP, origination fee, and third party costs.
- IMIP – A one-time fee charged at closing by FHA to insure the loan in the event there’s not enough value in the home in the future to settle the entire loan balance.
- Origination fee – This is charged by lenders to cover their overhead and help pad their bottom line. Lenders are often willing to negotiate this fee, particularly if you’re borrowing a pretty sizable initial loan amount.
- Third party costs – These are fees charged to cover third party services necessary for the completion of the loan. Common third party costs include title insurance, appraisal, government recording, credit report, etc. Lenders are not allowed to mark-up third party costs; they can only pass along the bona fide cost they were charged by the service provider.
If you’re refinancing with a HECM, it’s a good bet that most (or all) fees can be rolled into the new loan amount. At most, you may need to pay for the appraisal and counseling out of pocket, but the rest of the closing costs can be rolled into the loan.
If you’re purchasing with a HECM, you’ll likely need to cover all closing costs out of pocket along with your down payment.
How much are closing costs?
There’s no rule of thumb for the amount of closing costs you’ll be charged. Fees vary widely depending on the lender you work with, the amount you’re borrowing, where your home is located, and conditions in the financial markets.
If your initial loan amount is large, the lender may have some extra margin to cover some or all of your costs with a lender credit. If not, expect to cover most or all of the costs by rolling them into the loan (if you’re refinancing) or paying them out of pocket (if you’re purchasing).
If you want a solid closing cost estimate, you’ll probably need to consult with a few different lenders.
Fees are often negotiable
Depending on the lender, market conditions, and your starting loan amount, you may have some room to negotiate closing costs. However, keep in mind that lenders make money off of the initial loan amount. Larger loans generate more interest and more profit for the lender. If your starting balance is relatively large (such as when you’re paying off an existing mortgage), the lender will make more money on interest and likely have more leeway to discount closing costs.
On the other hand, if your home is free and clear (or very nearly so) and your starting loan balance is relatively low, the lender will make relatively little interest. The lender will likely have less room to discount.
If you’re successful at negotiating down the closing costs, you’ll receive the discount in the form of a lender credit. Lenders don’t cut or eliminate closing costs. Instead, they offset them with a lender credit, which is essentially a payment to you at closing to cover fees.
If you would like to get a discount on your closing costs, be sure to ask! Lenders want your business and the worst they’ll say is no, right?