Understanding Reverse Mortgage Interest Rates and Fees
By: Courtney Jorstad
February 5, 2023 • 5 minute read
A Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, provides a way for homeowners who are 62 years of age or older to access the equity in their home without having to take on additional monthly payments like they would if they took out a home equity loan or home equity line of credit (HELOC).
However, just like with a home equity loan, HELOC, or traditional mortgage, reverse mortgage loan borrowers are still required to pay interest and other fees.
In this article, we will cover what you need to know about reverse mortgage interest rates, fees, and other costs.
What are the Reverse Mortgage Upfront Costs and Fees?
There are a handful fees that will need to be paid as part of the reverse mortgage loan application and approval process. In most cases, these fees can be rolled into the total amount of the loan.
These fees include the following:
- HUD-Approved Counseling. Before officially applying for a HECM reverse mortgage, qualified homeowners must first attend a counseling session with a third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD). These counseling sessions vary in price, but they typically range from $125 to $200. However, the Consumer Financial Protection Bureau (CFPB) says that the counselors “cannot charge you a fee if you can’t afford it and must explain all charges prior to counseling.”
- Origination Fees. Origination fees are what lenders charge homeowners to initiate and process the loan. Lenders are required to use a formula provided by the Federal Housing Administration (FHA) to determine what the Origination Fee should be. According to this formula, lenders can charge 2% of the first $200,000 of the market value of the home and 1% of the remaining amount if the home is worth more than $200,000. Lenders may also charge up to $2,500 if the home is worth $125,000. However, lenders may not charge more than $6,000.
- Closing Costs. Borrowers will also need to pay several closing costs. These include title fees, appraisal fees, credit checks, recording fees, document preparation, courier fees, and others. These can range from $400 to $1,200.
- First Mortgage Insurance Premium. A mortgage insurance premium is charged annually, and you will pay the first one when the loan is first originated. This fee ensures that the expected loans payouts will be received in addition to other safeguards.
How do Reverse Mortgage Interest Rates Work?
Reverse mortgages can come with both fixed interest rates and variable rates.
The only time a borrower can receive a fixed rate on a reverse mortgage is when the money is disbursed as a lump sum. If you have a fixed interest rate on your reverse mortgage, this amount will be set when the loan is taken out and will stay the same throughout the life of the loan.
If any of the money is received as a line of credit or monthly payments, then borrowers are required to borrow the money at a variable rate, even if some of the money is received as a lump sum.
While variable rates go up and down, they are typically lower than fixed rates at the start of the loan. The variable rates for reverse mortgages come with a life cap, which means that the rate will never go above a certain level in relation to the starting rate. The cap is typically 5% or 10%, depending on what type of variable rate you receive — a yearly variable (5% cap) or monthly variable (10% cap). The monthly variable is the most common type of variable rate offered, and it typically has a lower starting rate.
With a reverse mortgage loan, you are only charged interest on the money you have received. This means that if you choose to receive your funds as a line of credit or monthly payments, you will not be charged interest on money that has not been paid out.
The interest charged is calculated daily and added to the balance of the loan each month. While most loans require monthly payments toward the balance and interest, reverse mortgage interest payments are deferred until the end of the loan.
The loan ends when the home is sold, it is no longer the primary residence of the homeowners, or when the borrowers pass away.
Other Reverse Mortgage Ongoing Costs
- Mortgage Insurance Premiums (MIP). As mentioned before, each year you will be charged a mortgage insurance premium. The MIP is combined with the interest rate charges. It’s an additional .5% charge. For example, if you’re charged a 4% interest rate, once the MIP is included, the total rate will be 4.5%.
- Servicing Fees. Reverse mortgage service fees are charged to cover the costs of the lender who is disbursing payments, sending monthly statements, and ensuring that the borrower continues to maintain the home, pay property taxes, and insurance. According to FHA guidelines, lenders may charge no more than $35 per month. However, some lenders waive this fee.
- Property taxes. Homeowners who take out a reverse mortgage must be current on their property taxes when they originate the mortgage and remain current on their property taxes throughout the life of the loan.
- Homeowner’s Insurance. Borrowers must also continue to pay for homeowner’s insurance. This may also include flood insurance, if necessary.
- Home maintenance costs. Reverse mortgage borrowers must also continue to pay for any necessary repairs and other costs that are required to maintain the home.
- HOA Fees. If the homeowners live in a home that is part of a homeowner’s association, they must continue to pay any required HOA fees.
If you are looking to keep your reverse mortgage costs as low as possible, CFBP recommends only borrowing as much as you need.
One way to manage how much you are borrowing is to opt to receive your funds as a line of credit. If you receive your funds as a line of credit, the money can sit in the account without collecting interest until you need it. But at least it’s available to use if or when a need arises.
If you are ready to move forward with a reverse mortgage, check out our list of recommended reverse mortgage lenders here.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.