Reverse Mortgage Closing Costs: What You Need to Know
Understand the various costs involved in closing a reverse mortgage, how they are calculated, and what to expect when finalizing your loan.
Reverse mortgages provide financial relief for homeowners 62 and older by converting home equity into cash. However, these loans come with closing costs that can add up quickly. Understanding these fees is essential before proceeding.
Required Mortgage Insurance Premium
The Federal Housing Administration (FHA) requires mortgage insurance on Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage. This insurance covers any shortfall if the loan balance exceeds the home’s value when sold, ensuring borrowers or their heirs never owe more than the home’s market value.
MIP includes an upfront premium of 2% of the home’s appraised value or the FHA lending limit, whichever is lower. For a $300,000 home, this amounts to $6,000 at closing. An annual MIP of 0.5% accrues over time, increasing as more funds are withdrawn. This charge is added to the loan balance rather than requiring out-of-pocket payments.
Origination Fees
Lenders charge origination fees to cover administrative costs such as underwriting and financial verification. The FHA caps these fees at 2% of the first $200,000 of a home’s value and 1% of any amount above that, with a maximum of $6,000.
For a $250,000 home, the lender could charge $4,500—$4,000 for the first $200,000 and $500 for the remaining $50,000. Proprietary (jumbo) reverse mortgages from private lenders may have higher fees.
Some lenders offer promotions that reduce or waive origination fees, but this often results in higher interest rates. Comparing multiple lenders helps borrowers find the best terms.
Home Appraisal Costs
A licensed appraiser must evaluate the home’s market value and ensure it meets lending standards, typically costing between $500 and $800, depending on location and property complexity.
If repairs are required, they must be completed before the loan proceeds. A second inspection may be needed, adding to costs. Homes in rural areas often face higher appraisal fees due to limited comparable sales. If the borrower disputes the valuation, they can request reconsideration, though changes are not guaranteed.
Title and Closing Charges
Finalizing a reverse mortgage involves legal and administrative costs, including title insurance, escrow fees, and recording charges.
Lenders require title insurance to protect against ownership disputes. Costs vary by state and home value but generally range from 0.5% to 1% of the loan amount. Borrowers can also purchase an owner’s policy for additional protection.
Escrow and settlement fees cover the cost of a neutral third party managing the transaction, typically ranging from $300 to $1,000. Recording fees, charged by local governments to document the loan, vary widely but generally fall between $50 and $500. Some states also impose mortgage or intangible taxes.
Mandatory Counseling Fees
Borrowers must complete a counseling session with a HUD-approved agency to ensure they understand loan terms, repayment obligations, and the impact on heirs.
Counseling fees typically range from $125 to $200, though some agencies offer reduced rates based on financial need. Sessions can be completed in person or over the phone, and borrowers receive a certificate required to proceed with the loan. Some lenders reimburse this fee, but policies vary.
Payment of Fees at Closing
Reverse mortgage closing costs can be paid upfront or rolled into the loan balance. Appraisal and counseling fees are usually paid out of pocket, while other costs are deducted from loan proceeds.
Rolling fees into the loan increases the total amount owed over time as interest accrues. Borrowers wanting to preserve more home equity may choose to pay certain fees upfront if they have available cash. Understanding these costs helps borrowers make informed financial decisions.