Thinking About a Reverse Mortgage? Here’s the Cost Breakdown

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For many retirees, a reverse mortgage can help fill the income gap when Social Security and savings do not cover everything. One of its biggest advantages is that it lets you tap home equity without making the monthly mortgage payments that come with many other financing options.

Still, reverse mortgages are not free. Borrowers face upfront charges and ongoing costs over the life of the loan. As long as the loan rules are followed, repayment is generally not required until you or a co-borrower permanently leave the home.

Because those costs can shape your retirement finances, it is important to understand them before moving forward. Here is a look at what you may pay from the application stage through the life of the loan.

Costs to expect before opening a reverse mortgage

Getting a reverse mortgage requires due diligence from both you and the lender, much like a traditional home loan. But because the structure is different, there are some extra expenses to consider.

Reverse mortgage counseling

Cost: Typically between $125 and $200, depending on the counseling agency

Home Equity Conversion Mortgages, or HECMs, are the most common type of reverse mortgage and are governed by Federal Housing Administration rules designed to protect borrowers and lenders.

That becomes clear early in the process, because HECM applicants must complete a counseling session. The Department of Housing and Urban Development maintains a list of approved agencies. During the session, you, and any co-borrowers or family members who want to participate, meet privately with a trained counselor who explains how the loan works and answers questions about your situation.

Although you will usually pay for this counseling at the start, the cost may not be as burdensome as it seems. HUD approves only nonprofit agencies for this service, and many of them receive grant support that allows them to offer free counseling to people with limited financial means.

Reverse mortgage closing costs

Cost: Varies depending on home value but often between 2% and 5% of the loan amount.

Like other home lending products, reverse mortgages come with closing costs. You can pay them upfront or add them to the loan balance. If you finance them, however, they reduce how much of your approved borrowing limit remains available later and can make the balance grow faster.

The exact amount depends on your location, loan terms and home value. Some fees are required under the HECM program, including mortgage insurance, while others may be waived by the lender. According to the Consumer Financial Protection Bureau, common charges include:

• Origination fee: Up to $6,000 for HECM loans.
• Upfront Mortgage Insurance Premium (MIP): 2% of your principal limit, or the maximum amount you can borrow
• Home appraisal: Often between $450 and $600, depending on location; this usually is not rolled into the loan
• Credit report: $50
• Flood certification: $20
• Document fee: $150
• Recording fee: $500
• Courier fee: $50
• Title insurance: $1,000
• Pest inspection: $100
• Survey fee: $250

Costs that continue after the loan is in place

Once the reverse mortgage is set up, you should also plan for ongoing expenses.

As with closing costs, some of these charges can be rolled into the loan balance. That can make borrowing more convenient, but it also increases the amount owed over time and can reduce how much money remains available later. Some of the following expenses are not mortgage charges themselves, but they are still required to keep the loan in good standing.

Annual Mortgage Insurance Premium (MIP) for HECM loans only

Cost: 0.5% of your outstanding loan balance per year

The longer you remain in the home, the more the balance can rise. In some cases, the amount owed may eventually exceed the home’s value if interest accumulates faster than the property appreciates. If that happens, you or your heirs do not have to repay more than the home is worth, because reverse mortgages are non-recourse loans.

That protection is backed by FHA insurance, which covers the gap between the loan balance and the home’s actual value. The upfront mortgage insurance premium helps fund that protection, and the annual premium continues to be added to the loan balance. The longer the loan remains open, the more likely it is that the lender may rely on that insurance coverage.

Interest

Cost: 3.5% to 8.0%

Reverse mortgages also accrue interest, which is added to the balance. Since this is a lender-set charge, it makes sense to compare offers before applying. A lower rate can slow the growth of the loan balance and preserve more equity over time.

The range above reflects recent averages. Your actual rate will depend on market conditions when you borrow, along with factors such as your age, loan type, home value and how you choose to receive the funds.

Servicing fees

Cost: $30 to $35 per month

As you compare rates, it is also worth asking whether the lender charges servicing fees. Some lenders add these to the loan balance each month. These fees help cover administrative costs such as sending statements and handling payments.

Changes to your payment plan

Cost: $20 to change payment plans

When you open a reverse mortgage, you can typically choose a lump sum, a line of credit, monthly payments or a combination of those options. Your needs may change over time, and you may decide another payout method suits you better. If so, lenders may charge a small fee of up to $20 to make the switch.

For instance, if you have been receiving monthly payments but later inherit money and no longer need them, you might change to a line of credit so you still have access to funds in the future if needed.

Property taxes, insurance and maintenance

Cost: Variable

Beyond the benefit of not making monthly mortgage payments, another major advantage is that many loan-related costs can be folded into the reverse mortgage itself. For retirees who are short on cash, that can be a significant help.

But there are still expenses you must pay to stay current on the loan. It is smart to plan for these in advance, because falling behind could allow the lender to call the loan due or foreclose on the home. The ongoing obligations generally include:

• Property taxes
• Homeowners insurance
• Flood insurance, if required
• Homeowners association fees
• Home maintenance sufficient to keep the property in good repair

These costs vary widely by location, but they can add up quickly. Zillow has estimated that the “hidden” costs of homeownership top $15,000 a year on average, with maintenance taking the largest share. Even if some discretionary upkeep is reduced, such as regular lawn care, property taxes and insurance premiums tend to rise over time, so it is important to plan for them.

If you already owned a home with a mortgage before, many of these expenses may feel familiar. They also help keep the house safe, comfortable and in good condition.

If you are worried about covering these ongoing property costs, you may be able to use a Life Expectancy Set-Aside, or LESA. Under a LESA, a portion of reverse mortgage proceeds is reserved to pay property-related costs and insurance charges over the life of the loan. Borrowers with limited financial resources may be required to use a LESA in order to qualify.

A quick summary of reverse mortgage fees

Reverse mortgage fees do increase the overall cost of borrowing. Even so, some charges can be negotiated or eliminated, and many can be paid from the loan proceeds rather than out of pocket, which reduces the upfront burden. As with most financial products, the final cost will depend on your lender and your personal financial profile.