The three largest closing costs are the FHA mortgage insurance, the origination fee, and escrow fees. However the only cost that is typically paid out of pocket is counseling.
FHA Mortgage Insurance
With a HECM, the borrower is required to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25 percent. (Please see chart below for more details regarding the initial MIP).
The mortgage insurance premium provides the following safeguards:
- The HECM is a “non-recourse” loan. If you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt
- If the lender becomes insolvent or otherwise fails to make payments due the borrower; MIP ensures that the borrower will continue to receive their payments
The origination fee is what the reverse mortgage lender earns on the loan. The FHA 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
- A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000
Title is required for all mortgages whether reverse or conventional. The largest part of title fees is title insurance. Title 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)
- Doc prep
An appraisal is required to determine your home’s value. A reverse mortgage appraisal is conducted by an FHA-approved appraiser and follows specific FHA guidelines that require more documentation than a typical appraisal. The cost of the appraisal can vary.
Other Closing Costs
- Wire Fee
- Flood Cert
- Credit Report
Interest and annual mortgage insurance premium accumulates on a reverse mortgage loan. However, instead of paying down the balance like you would on a traditional mortgage, the loan balance increases over time.
Interest Rate and Mortgage Insurance
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%.