The three largest closing costs are the Federal Housing Administration (FHA) mortgage insurance, the origination fee, title and other closing settlement fees. However, the only cost that is typically paid out-of-pocket is for HUD counseling.
FHA Mortgage Insurance Premium (MIP)
A HECM loan requires the borrower to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25%. (Please see chart below for more information regarding the initial MIP.)
Once the initial MIP percentage has been determined, the MIP is calculated by multiplying the initial MIP percentage by the Maximum Claim Amount (MCA). The MCA is defined as the lesser of the appraised value, sale price or the maximum lending limit.
The FHA MIP provides these guarantees:
- If you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home
- You will continue to receive your HECM proceeds, based upon the program plan you selected, even in the event that your lender becomes financially troubled
The origination fee is what the reverse mortgage lender earns on the loan. HUD uses a formula to determine what the lender can charge. The formula is:
- 2% of the first $200,000 of the property’s value and 1% of the amount over $200,000
- A maximum of a $6,000 origination fee
Title and Closing Settlement Fees
Title guarantees the homeowner’s legal ownership of the property. These fees are required for all mortgages whether it is a reverse or conventional loan. The largest part of title fees is title insurance. Title and closing settlement fees are usually broken down into:
- Title insurance (varies by state and with property value)
- Title settlement
- Title search/exam
- Payoff (if a mortgage is being paid off)
- Document preparation
The appraisal establishes the legal value of the home. A reverse mortgage appraisal is conducted by an independent HUD approved appraiser and follows specific HUD guidelines that require more specific documentation than a typical appraisal.
Other Closing Costs
- Counseling fee
- Wire fee
- Flood certification fee
- Credit report fee
A reverse mortgage loan accrues interest similar to a traditional mortgage except the homeowner is not making payments (interest or principal) each month to reduce the loan balance. As a result, the loan balance grows with a reverse mortgage until the loan becomes due, usually when the homeowner permanently moves out of the property or passes away.
Interest Rate and Mortgage Insurance
Over the last few years, the interest rates on reverse mortgage loans have fluctuated between 3% and 5%. The true interest rate is one and a quarter percentage points above the quoted rate because the total rate includes the FHA’s ongoing Mortgage Insurance Premium (MIP) charges. For example, if the quoted rate is 4.51%, with the MIP charges of 1.25%, the total rate would be 5.76%.