Understanding Reverse Mortgage Loan Closing Costs
If you are age 62 or older, you may be looking into a Home Equity Conversion Mortgage (HECM), or reverse mortgage loan, to help fund your retirement. While more than one million U.S. homeowners have used this loan to age in place, it is important you get educated on loan facts to decide if this financial planning tool is right for you.
Make sure to learn about typical expenses associated with a reverse mortgage loan, including closing costs. While a benefit of this loan is the ability to finance many of the closing costs into the loan itself to minimize the impact of any up-front, out-of-pocket charges, it is helpful to be aware of all closing fees, which usually include:
Mortgage Insurance Premiums (MIPs)
One of the many benefits of a HECM reverse mortgage loan is a safeguard provided by the U.S. Department of Housing and Urban Development (HUD) in the form of mortgage insurance. HECM loans are insured by HUD to protect you as a borrower should any of the following situations occur:
- Your loan balance exceeds your home’s value. You will never owe more than the value of your home when sold, regardless of your loan balance. With this insurance, the Federal Housing Administration (FHA) will pay the difference.
- Your lender goes out of business. As long as you comply with the loan terms, you are guaranteed to continue receiving the funds you signed up for until the last borrower, or eligible non-borrowing spouse, leaves the home. Even though your lender is responsible for providing you with the full loan amount, mortgage insurance ensures the FHA will step in and pay you the remaining loan amount, even if your lender goes out of business.
- You encounter a foreclosure on the home. With mortgage insurance, you are protected from the lender using any of your assets, other than your home, to pay back the loan.
The mortgage insurance premium is the fee that will pay for these insurance protections.
Loan Origination Fee
Another fee you will encounter is the loan origination fee. This fee simply covers the lender’s business expenses to operate. At American Advisors Group, your reverse mortgage professional will assist you through the entire reverse mortgage loan process, sharing their expertise and guidance. This fee is strictly regulated by the Federal Housing Administration (FHA), to protect you by restricting excessive origination charges.
Lender Servicing Fee
Another typical closing cost with a reverse mortgage loan is a lender servicing fee. Lenders typically receive this fee for administering the loan, monitoring taxes and insurance, and providing other services related to the loan. Fortunately, a benefit associated with being an American Advisors Group borrower is that you will not be charged a lender servicing fee. Other lenders may charge as much as $35 a month.
Other Typical Reverse Mortgage Closing Costs
Reverse mortgage loan expenses may also include closing costs that are typical of any loan. This may include the following:
- Title Insurance. This insurance protects both buyer and lender against potential losses from possible property ownership disputes.
- Recording Fee. This is a fee to record the mortgage lien with your county’s recorder’s office, often the county clerk.
- Documentation Preparation Fees. This is a fee for the preparation of all final closing documents.
- Credit Report Fee. This is a fee for verifying any liens or judgments.
- Pest Inspection Fees. This fee is for inspecting to see if the home is infested with any pests.
- Flood Certification Fee. This fee is to determine if the property is located on a flood plain.
- Survey Fee. This fee determines property boundaries and ensures the neighboring property is not intruding upon the reverse mortgage borrower’s property.
- Courier Fee. This fee covers the delivery of documents between the lender and loan investor or title company.
- Settlement/Escrow/Closing Fee. This is the fee for closing services such as a title search.
If you determine that a reverse mortgage loan is the right option, one way to financially prepare for it is to educate yourself on typical fees and costs. As mentioned before, some fees are put in place for borrower protection and many fees are federally capped or strictly regulated to provide an additional level of security for the borrower. Some fees can be waived or negotiated, and most of them can be rolled directly into the loan itself, greatly minimizing the impact of upfront, out-of-pocket expenses.
Disclaimer notice: Origination fees, lender margins, payment options, and closing costs are subject to change and may vary. Amortization tables and APR calculations will be provided by your lender in the loan application package. A good faith estimate of closing costs, TALC disclosure, and other disclosures will also be provided on the loan application as required by the Truth in Lending Act and Regulation Z.