Reverse Mortgage Closing Costs & Fees Explained

By Michael G. Branson Edited by Cliff Auerswald 6 comments

When considering a reverse mortgage, it’s important to understand the various costs involved. These expenses can differ significantly, not just between different lenders but also based on your home’s location.

To ensure you’re getting the best possible deal, it’s smart to shop around and compare lenders. Among the costs, the origination fees (which cover the setup of your loan) and the lender’s margin (determining your loan’s interest rate) are particularly important to pay attention to.

Interest rates are another important factor. They represent the cost of borrowing money and will affect how much you can get from your reverse mortgage and the total amount of interest that will add up over time.

My goal is to help you clearly understand these costs so that you can confidently make informed decisions about your reverse mortgage.

Breakdown of Reverse Mortgage Closing Costs

Disclaimer: Home value of $250,000 used in this estimate. Please note that the closing costs associated with reverse mortgages can vary significantly from state to state. The information provided in the table is a general guideline and may not reflect the specific costs or fees that apply to your situation. To obtain the most accurate and up-to-date information on closing costs, consult directly with your lender. They will be able to provide you with a detailed breakdown of all applicable charges based on your home's location and your individual circumstances. Always ensure that you have a clear understanding of all fees and costs before proceeding with a reverse mortgage.

Itemized Closing Cost Explanation

Origination Fee: This charge is for the lender’s services in processing your Home Equity Conversion Mortgage ( HECM ) application. It’s essentially the cost for a lender to process your loan from start to finish. FHA sets limits on how much lenders can charge for this fee to protect borrowers from excessive costs. Specifically, a lender can charge no more than $2,500 or 2% of the first $200,000 of your home’s value, plus 1% of any amount over $200,000. However, no matter what your home is worth, the origination fee for a HECM can’t exceed $6,000.

Document Preparation: This is a 3rd party service selected by the lender responsible for preparing the final closing documents, including the note, deed of trust, agreement, etc. They are responsible for ensuring the documents follow local and federal guidelines.

Flood Certification: This is a 3rd party service responsible for ascertaining whether a property is in a Flood Zone as determined by FEMA and provides a Life of Loan determination/guarantee.

Initial Mortgage Insurance (MIP): This insurance premium is paid directly to HUD at closing to insure the individual loan under the HECM program.

Settlement Closing: This is a 3rd party service responsible for handling the settlement or closing of the loan. They work with the title company to get the public records information, work with existing lenders to obtain payoffs, coordinate with the lenders for funding, and the counties to record the loan.

Counseling: This is a 3rd party service that provides counseling sessions to each Reverse Mortgage loan applicant in the beginning stage of the process. The counselors are tasked with educating the borrowers about Reverse Mortgages and determining if they may qualify for any other types of financing. This is a HUD requirement to start the Reverse Mortgage process.

Appraisal: The home appraisal is an important step in the reverse mortgage application. This assessment establishes your property’s current market value, a key figure that determines the amount you can qualify for with a reverse mortgage. This fee is part of this process, and it varies by location.

Credit Report: This is another 3rd party service. The credit company must provide a full credit report from all 3 bureaus (Experian, Transunion & Equifax) for each Reverse Mortgage applicant to determine the borrower’s credit scores, credit history, and any delinquencies or public record items. This is a necessary step in the process as a lender must review a borrower’s credit history for specific things to determine eligibility for the program.

Lender Title Insurance: This is a 3rd party service required for any loan that is done and not specific to Reverse Mortgages. For every loan done, a title report must be obtained from a Title Company, and the company must ensure the lender in the transaction for the required dollar amount based on appraised value, etc. The fee for title insurance usually varies by loan type and from state to state.

Endorsements: Lenders require various endorsements to the title policy based on the loan type. The charges for these endorsements will vary from state to state. For a Reverse Mortgage, some required endorsements are the Neg-Am and Environmental; to provide these endorsements to the procedure, there are usually additional charges. Other approvals needed can vary based on property type (ex., Condo, PUD, Manufactured Home).

Recording: Whenever a new loan is completed, the Security Instruments ( Deeds of Trust or Mortgage – verbiage varies from state to state) must be recorded with the county recorder’s office to finalize the transaction. There is always a charge to record documents, so there is a Recording fee for all loans. Recording charges can vary from County to County and State to state.

Notary: All final loan documents must be executed before a notary, as some documents require notarization, such as the deed of trust. This is a 3rd party service based on the amount the signing service will charge for handling the signing and notarizing all necessary documents.

State-Specific and Miscellaneous Fees

State Tax/Stamps Mortgage: In some states (ex., Florida), there are state charges whenever you do any Real Estate transaction, including Refinances. These state or county-specific charges must be paid based on the dollar amount shown on the Deed or Mortgage.

Intangible Tax is like the State Tax/Stamps Mortgage and is required for all Real Estate Transactions in some states. Again, the example is Florida, which has a mandatory state charge.

Other States such as Texas, Illinois, Pennsylvania, and New Jersey (to name a couple) have other miscellaneous additional charges not seen on all Good Faith Estimates as they are either local or state fees that vary from transaction to transaction but usually do not add up to be too significant as far as the dollar amount of the cost.

Interest Costs – Choosing Between Fixed and Variable Rates

Interest rates are a significant factor that affects the cost of a reverse mortgage for borrowers. When choosing a reverse mortgage, you have two interest rates to consider: fixed and variable rates.

Fixed-rate reverse mortgages were once the go-to choice for many HECM borrowers because they offer the stability of an interest rate that doesn’t change over the years. However, recent regulatory changes have placed limitations on how much money you can access upfront with a fixed-rate loan, making it less attractive for some borrowers.

On the other hand, variable-rate reverse mortgages come with interest rates that can fluctuate over time, which means the cost of the loan may increase or decrease. It’s important to note that regardless of the type of interest rate, the entire loan balance becomes payable when the loan matures—typically when you sell your home, move out, or in the event of your passing.

Variable rates are known for their flexibility, especially with payment options. For instance, the line of credit plan is a popular choice among borrowers due to its adaptability and the possibility of the credit line growing over time.

Cost Comparison: HECM Reverse Mortgage vs. Traditional Mortgage

The comparison between Home Equity Conversion Mortgages (HECM) Reverse Mortgages and Traditional Mortgages reveals significant differences. HECM Reverse Mortgages offer a higher lending limit of $1,149,825 compared to $766,550 for traditional mortgages and maintain a loan duration for the borrower's life, unlike the fixed 15-year or 30-year terms of traditional mortgages. While HECMs come with an average fixed rate of 7.56% (8.99% APR) slightly higher than the 6.96% (7.25% APR) for traditional mortgages, they also require upfront (2%) and monthly (.50%) mortgage insurance payments, which are not typical for traditional mortgages. These distinctions underline the HECM's suitability for borrowers seeking lifetime duration loans with higher limits, albeit with higher insurance costs, versus the potentially lower upfront cost options and fixed terms of traditional mortgages.