What Is the Cost of a Reverse Mortgage?

A reverse mortgage allows homeowners, aged 62 or older, to convert a portion of their home equity into cash. Unlike a traditional mortgage where payments are made to a lender, a reverse mortgage involves the lender making payments to the homeowner as a lump sum, monthly installments, or a line of credit. This financial tool provides older adults with access to funds for purposes such as supplementing retirement income, paying off existing debts, or covering medical expenses. A reverse mortgage is a loan secured by your home, with various costs and financial responsibilities.

Upfront Reverse Mortgage Fees

Several upfront fees contribute to the overall cost of a reverse mortgage, incurred at loan closing. One primary upfront cost is the origination fee, which compensates the lender for processing the application. For Home Equity Conversion Mortgages (HECMs), insured by the Federal Housing Administration (FHA), this fee is regulated. Lenders can charge the greater of $2,500 or 2% of the first $200,000 of the home’s value, plus 1% of any amount over $200,000, with a maximum cap of $6,000. For instance, on a home valued at $300,000, the origination fee might be calculated as 2% of $200,000 ($4,000) plus 1% of the remaining $100,000 ($1,000), totaling $5,000.

Another upfront charge is the Initial Mortgage Insurance Premium (MIP), paid to the FHA to insure the loan. This insurance protects both the lender and the borrower, ensuring the borrower will never owe more than the home’s value, even if the loan balance exceeds the property’s worth. For FHA HECMs, the initial MIP is 2% of the home’s appraised value or the FHA lending limit, whichever is less.

Borrowers also encounter third-party closing costs, similar to traditional mortgages. An appraisal fee determines the home’s current market value, influencing the amount that can be borrowed. Appraisal costs generally range from $300 to $1,200, depending on factors such as property size, age, condition, and location.

Title insurance and search fees ensure the property’s title is clear of liens or ownership disputes. Escrow or settlement fees cover the administrative cost of managing the closing process.

Recording fees officially register the mortgage with the county recorder’s office, making the transaction a public record. A credit report fee is assessed to check the borrower’s credit history. If required, a pest inspection fee ensures the home is free from wood-destroying organisms. These upfront fees reduce the net proceeds available to the borrower.

Ongoing Reverse Mortgage Charges

A reverse mortgage involves ongoing charges that accrue over the life of the loan, contributing to the growing loan balance. These charges are not paid out-of-pocket by the borrower monthly.

One recurring charge is the Annual Mortgage Insurance Premium (MIP), which protects the lender and borrower throughout the loan term. For FHA HECMs, this annual premium is 0.5% of the outstanding loan balance. This amount is added to the principal balance of the loan, causing the total amount owed to increase over time.

Loan servicing fees cover the administration of the reverse mortgage, including sending statements and managing disbursements. For FHA HECMs, these fees are capped at $30 to $35 per month, depending on the loan’s rate. These servicing fees are added to the loan balance or deducted from available funds.

Interest accrual is a significant financial aspect, even without monthly payments from the borrower. Interest is calculated on the outstanding loan balance, which includes disbursed funds, initial fees, and previously accrued interest and MIP. This means interest compounds over time, leading to a continuously growing loan balance. The interest rate can be fixed or adjustable, with adjustable rates often tied to financial indexes.

Since borrowers are not required to make monthly payments, accrued interest is added to the loan balance, reducing home equity over time. This compounding effect means the total amount owed can grow substantially over many years. FHA insurance ensures the amount owed will never exceed the home’s value when the loan becomes due.

Understanding How Costs Are Paid

The various fees and charges associated with a reverse mortgage are handled to minimize upfront out-of-pocket expenses for the borrower. Most costs are integrated into the loan itself, allowing homeowners to access their home equity without needing significant cash reserves at closing.

The majority of upfront fees, including the origination fee, the initial Mortgage Insurance Premium (MIP), and many third-party closing costs, are financed into the reverse mortgage loan. These amounts are added to the loan balance, rather than being paid directly by the borrower at closing.

Financing these costs directly reduces the net amount of cash or credit line available to the borrower. The principal limit represents the maximum amount that can be borrowed, determined by factors such as the age of the youngest borrower, current interest rates, and the home’s appraised value. When upfront fees are financed, they are deducted from this principal limit, meaning the borrower receives a lower net principal limit. This impacts the usable funds the homeowner can access immediately or over time.

Ongoing charges, such as the annual MIP and accrued interest, are also added to the loan balance. This continuous addition of costs causes the total amount owed to increase throughout the life of the loan, further reducing the home equity and increasing the debt that must eventually be repaid. While no monthly payments are required, the borrower’s equity in the home steadily decreases as the loan balance grows.

The structure of a reverse mortgage ensures that the loan balance grows over time, as interest and fees are compounded and added to the principal. This contrasts with traditional mortgages where regular payments reduce the principal. When the loan eventually becomes due, such as when the last borrower moves out or passes away, the accumulated loan balance, including all financed costs and accrued interest, must be repaid from the sale of the home.

Key Borrower Financial Obligations

While a reverse mortgage eliminates monthly mortgage payments, it does not absolve homeowners of all financial responsibilities related to their property. Borrowers must adhere to ongoing obligations to avoid defaulting on the loan and potentially losing their home. These responsibilities are conditions of the reverse mortgage, distinct from the loan’s direct fees.

One primary obligation is the timely payment of property taxes. The homeowner retains ownership and is responsible for ensuring all property taxes are paid in full and on time. Failure to pay property taxes can lead to severe consequences, including the lender declaring the loan in default, making the entire loan balance immediately due and payable and potentially resulting in foreclosure. Lenders conduct a financial assessment to ensure borrowers can meet these obligations, and may require a “Life Expectancy Set-Aside” (LESA) to cover future tax and insurance payments from the loan proceeds.

Maintaining adequate homeowner’s insurance is another mandatory condition. This insurance protects the property from damage due to events like fire, natural disasters, or theft. Borrowers must keep policies current and pay premiums on time, as a lapse in coverage can lead to default. Lenders require this to safeguard their investment, and may purchase insurance on the borrower’s behalf at a higher cost if coverage lapses.

Borrowers are also responsible for maintaining the home in good condition, ensuring it remains a safe and habitable residence. This obligation protects the property’s value, which serves as collateral for the reverse mortgage. While not a direct fee, this requires financial outlay for necessary repairs and upkeep. Failing to maintain the property can be considered a breach of the loan agreement, potentially leading to default and the loan becoming due.