Although a reverse mortgage might sound too good to be true, it’s a legitimate way for seniors to receive some financial benefit from the equity in their home. A reverse mortgage is a backward loan, where the balance of the loan increases, rather than decreases over time. That’s because the borrower receives a payment from the loan rather than paying on the loan. Payments typically continue until the borrower passes away, sells the house, or permanently moves away from the residence.
Like other loans, reverse mortgages come with fees that can increase the total amount of money owed. When you’re choosing a reverse mortgage, it’s important to pay attention to the fees. Unusual fees could be a sign of a reverse mortgage scam.
1. Origination Fee
The reverse mortgage origination fee is similar to other loan origination fees. This covers the lenders cost of originating the loan. This includes the cost of creating, processing, and closing the loan. The government has set limits on origination fees on federally backed reverse mortgages or home equity conversion mortgages (HECMs). The maximum origination fee will be equal to 2% on loans up to $200,000. Any amount over $200,000 will be subject to a 1% fee. There’s a maximum fee limit of $6,000.
Private reverse mortgages typically charge an origination fee between 0.5% to 2.0% on the amount of the loan.
2. Appraisal Fee
Your home must be appraised before receiving a reverse mortgage. This allows the lender to determine the amount of your loan, which is typically some percentage of your home’s value. The appraiser also looks at your home to make sure there is no serious damage that would cause the lender to deny your reverse mortgage. If the appraisal shows that repairs are necessary, you’ll need a follow-up appraisal to ensure the repairs were done properly.
Appraisal fees are typically between $300 to $400 and $50 to $75 for a follow-up.
Closing costs are the fees paid to the lender at the time of closing. Many of the closing costs are costs that have incurred during the loan process and are simply paid at the end of the loan process. In a reverse mortgage typical closing costs include:
- Attorney fees
- Recording fees
- Document taxes
- Survey fee
- Application fee
- Title insurance
- Pest inspection
Closing costs typically range from 2.0% to 4.0% of the total loan amount. On a $150,000 reverse mortgage, closing costs would be between $3,000 to $6,000.
4. Monthly Service Fee
Reverse mortgages have a monthly fee that’s charged based on the borrower’s age and life expectancy. The younger you are when you get a reverse mortgage, the more you’ll pay in total monthly service fees. The monthly fee is typically between $30 and $35, but the total service fee over the life of the loan can be thousands of dollars.
5. Mortgage Insurance Premium
The HECM program includes mortgage insurance to ensure that you will continue to have access to your funds if the company that services your loan goes out of business. The mortgage insurance also ensures that your payback amount is never greater than the value of your home.
Mortgage insurance premium requires and upfront charge of less than 2% of your claim amount, or 2% of your home value. Then you’re charged an annual premium that’s 0.5% of your loan balance. Therefore, your mortgage insurance premium increases every year.
Reverse Mortgage Scam Fees
Watch out for fees that are tied to another type of product. Many companies that offer reverse mortgage try to convince you to buy an annuity or long-term care insurance. If a company begins tacking on fees that are unrelated to the reverse, it’s a red flag that something is wrong. You have three business days after closing to cancel most reverse mortgages without penalty. If something seems wrong about your reverse mortgage and you’ve already signed the contracts, notify the lender of your cancellation in writing within the 3-day window.
Related posts: