Reverse Mortgage Costs and Fees

What You Are Charged at Closing

The first bill a homeowner meets is the set of closing costs. The CFPB lists the main upfront costs of a HECM as an origination fee paid to the lender, real estate closing costs paid to third parties, and an initial mortgage insurance premium paid to the FHA (CFPB). Counseling can also carry a fee.

Upfront mortgage insurance premium (MIP). This is a charge for the FHA insurance that stands behind the loan. The insurance protects the borrower's access to loan funds and covers the lender if the home sells for less than the balance. HUD sets the rate and publishes the current figure in its Mortgagee Letters.

Origination fee. This is the lender's charge for setting up the loan. Federal rules limit it, and the lender discloses the amount.

Third-party closing costs. These include the appraisal, title work, recording and similar charges. They vary by property and location.

Counseling fee. Before a HECM, the borrower must meet with an independent, HUD-approved counselor. The CFPB says agencies may charge a reasonable fee, cannot charge a fee if the homeowner cannot afford it, and must explain all charges before counseling begins (CFPB).

Most of these charges do not have to come out of pocket. Under 24 C.F.R. § 206.31(a), the lender may collect closing fees "either in cash at the time of closing or through an initial payment under the mortgage." Paying through the loan sounds easier, and it is. But it also means those costs join the balance on the first day and earn interest from then on.

One point is worth holding onto. Where the rules name a dollar limit, it is a ceiling, the most a lender may charge. It is not the price a borrower pays. The lender's own disclosures show the actual charges.

Costs That Keep Growing After Closing

Many families are surprised that the costs keep coming after closing day. With no monthly payment going out, nothing seems to be due. Yet the balance is still growing quietly in the background.

The CFPB lists the ongoing costs of a HECM as including interest, servicing fees and an annual mortgage insurance premium. These are "added to your loan balance each month" (CFPB).

Interest. This is the price of borrowing. It is charged on the balance the borrower owes. Because no monthly payment is required, the interest is added to the balance rather than paid off.

Annual MIP. The FHA insurance continues for the life of the loan. Its yearly charge is figured on the outstanding balance and added to it. HUD sets the rate and publishes it.

Servicing fees. The CFPB describes these as fees paid to the lender for sending statements, sending out loan funds and checking that the borrower keeps up with the loan's requirements. The lender discloses any servicing fee.

These three costs feed on one another. Each month, interest and fees are charged on a balance that already includes last month's interest and fees. The CFPB notes that the larger the balance and the longer the loan stays open, the more the ongoing costs add up. Each January, the lender must send a statement showing the total paid to the homeowner, the deferred interest added and the balance at the end of the prior year (12 U.S.C. § 1715z-20(e)(3)).

Property taxes, homeowners insurance and upkeep are different. These are not ongoing loan costs. They stay the borrower's own bills, paid directly. If the borrower does not pay property charges as the rules require, or does not meet another duty under the mortgage, the loan can become due and payable with HUD's approval (24 C.F.R. § 206.27(c)(2)). Knowing this ahead of time lets a household plan for these bills.

How the HECM Mortgage Insurance Premium Works

"Why pay insurance on a loan that pays me?" is a fair question. The answer is that the insurance protects both sides of the loan when something goes wrong.

On the borrower's side, federal law directs HUD to step in if the party responsible for paying the borrower defaults. HUD must "provide any mortgagor under this section with funds to which the mortgagor is entitled under the insured mortgage" but has not received for that reason (12 U.S.C. § 1715z-20(i)(1)(A)). In plain words, if the lender fails, the borrower's access to the loan funds owed is protected.

On the lender's side, the insurance covers a shortfall. Over time, a growing balance can come to exceed what the home is worth. The law says the homeowner "shall not be liable for any difference" between what is owed and what the lender recovers from the net sale proceeds of the home or from the insurance benefits paid (12 U.S.C. § 1715z-20(d)(7)). This is called non-recourse. It means the debt is limited to the home itself, and the borrower's other savings are not on the hook for the gap. The FTC explains that with a non-recourse clause, the borrower or the estate "can't owe more than the value of your home when the loan becomes due and the home is sold" (FTC).

The premiums pay for that protection. HUD has said its premium changes were made to help sustain the program and strengthen the Mutual Mortgage Insurance Fund, the pool the insurance pays from (HUD Mortgagee Letter 2017-12).

Insurance does not remove the borrower's duties. The loan can still come due if the home stops being a principal residence or if taxes, insurance or upkeep go unpaid. HUD runs the HECM program, and the CFPB and FTC pages cited here offer plain consumer guidance on these points.

The Origination Fee and What Federal Rules Say About It

People often search for the "cap" on the origination fee, hoping for one clear number. What matters more for a homeowner is how the limit works and where to find the actual charge.

The origination fee is what the lender charges to take the application, check the borrower and the home, and prepare the loan. The HECM statute, 12 U.S.C. § 1715z-20(r), directs HUD to set limits on it. HUD's regulation at 24 C.F.R. § 206.31(a)(1) sets those limits and says plainly: "Mortgagees may accept a lower origination fee." The regulation also says the fee "may be fully financed with the mortgage," which means it can be added to the loan balance rather than paid in cash. Fees paid to a sponsored third-party originator, such as an outside company that helps arrange the loan, may be counted within the origination fee.

So the limit works as a ceiling, and the lender discloses what it actually charges. Federal law requires the borrower to receive "full disclosure, as prescribed by the Secretary, of all costs charged," and that disclosure must "clearly state which charges are required to obtain the mortgage and which are not" (12 U.S.C. § 1715z-20(d)(2)(C)). Before closing, the lender must also give a statement of the projected total cost of the loan over at least two loan lengths, including a short term and one matching the borrower's life expectancy (12 U.S.C. § 1715z-20(e)(4)).

The law also guards against add-ons. HUD must set restrictions so that the borrower does not fund "unnecessary or excessive costs," including estate planning or financial advice sold with the loan (12 U.S.C. § 1715z-20(d)(11)). The FTC adds that no one has to buy other financial products, such as an annuity, to get a reverse mortgage (FTC).

Third-Party Closing Costs and the Appraisal

Not every closing charge goes to the lender. Some go to the people who check the home and record the loan.

HUD's regulation lets a lender collect "reasonable and customary amounts, but not more than the amount actually paid," for a list of closing items (24 C.F.R. § 206.31(a)(2)). The list includes:

• Recording fees and taxes. These are what the county charges to put the mortgage on public record.
• Credit report. This shows the borrower's credit history.
• Survey. This maps the property's boundaries, and it is charged only if the lender or the borrower requires one.
• Title examination and the lender's title insurance. The title search checks who owns the home and what liens are on it, and title insurance protects against an error in that record.
• Appraisal. This is the fee for the first appraisal of the home.
• Flood certification. This shows whether the home is in a flood zone.

The list continues with "such other charges as may be authorized" by HUD. These costs vary with the property, the location and the vendors used. Like other closing fees, they can be paid through the loan.

The appraisal matters more on a reverse mortgage than it may seem. An appraiser estimates what the home is worth. HUD says the amount available depends on the age of the youngest borrower or eligible non-borrowing spouse, the current interest rate, and the lesser of the appraised value, the HECM FHA mortgage limit or the sales price (HUD). That smaller figure is called the maximum claim amount. HUD sets the mortgage limit and publishes the current figure. The home must also meet FHA property standards, and the lender says what repairs are needed if it falls short (CFPB).

What Will Be Owed When the Loan Comes Due

For an adult child, this is often the real question: what will be owed at the end, and can the family keep the house? The answer starts with what makes the loan due.

Under 24 C.F.R. § 206.27(c), the full balance becomes due when a borrower dies and the home is not the principal residence of at least one surviving borrower, or when a borrower transfers all title and no other borrower keeps title. With HUD's approval, it also becomes due if any of these happens:

• the home stops being a borrower's principal residence for reasons other than death, and no other borrower lives there
• a borrower is away for more than 12 months in a row because of physical or mental illness, and no other borrower lives there
• the borrower does not pay property charges as required
• the borrower does not meet another duty under the mortgage

For an eligible non-borrowing spouse (a spouse who is not on the loan but meets HUD's conditions), the rules provide a deferral period that delays the due date while that spouse's requirements continue to be met. Living in the home matters from the start: it must be the principal residence of each borrower, and of any eligible non-borrowing spouse, at closing (24 C.F.R. § 206.39(a)).

What is owed at that point is everything added over the years. That includes the money paid out, the financed closing costs, and the interest, mortgage insurance and servicing fees. Because of the non-recourse rule described earlier, the borrower or estate is not liable for any amount beyond what the home brings.

A family member who wants to keep the house can pay off the loan. The law says repayment may be made "without penalty at any time" (12 U.S.C. § 1715z-20(d)(4)). The CFPB notes that the homeowners or heirs will eventually repay, "usually by selling the home." The time allowed and the exact payoff options depend on the loan documents and HUD's rules. The loan servicer can explain them, and an attorney can help with an estate.

How Reverse Mortgage Costs Compare to Other Home Equity Options

Costs only make sense next to the other choices. The CFPB notes that a reverse mortgage "is more expensive than other home loans," typically (CFPB). It also lists other paths, including waiting, a home equity loan or line of credit, refinancing, downsizing and lowering expenses. Each trades something different.

Home equity loan. This pays one lump sum, repaid in regular monthly payments. The balance goes down as payments are made, but the payment has to fit a monthly budget.

Home equity line of credit (HELOC). This lets the owner borrow as needed, up to a limit, and payments rise or fall with what is used. The reverse mortgage vs HELOC comparison shows how differently the two balances move.

Cash-out refinance. This replaces the current mortgage with a larger new one and pays out the difference. It brings a new monthly payment, and the lender reviews credit and income.

Selling or downsizing. This turns equity into cash with no loan, but it means leaving the home.

Reverse mortgage. There is no monthly mortgage payment. The borrower still pays taxes, insurance and upkeep, and interest and fees build so that the balance grows. The loan comes due on the events described above. A homeowner who still owes on a mortgage must pay it off at closing, with the reverse mortgage funds or other money (CFPB). Retiring with a mortgage still owed raises its own questions.

Help is also available outside of borrowing. The CFPB points to local programs for utilities, repairs and property taxes. The required HECM counseling must cover options other than a HECM, including other housing, social service, health and financial options (12 U.S.C. § 1715z-20(f)). A HUD-approved counselor is the person who walks through how these choices apply to one household. The plain side-by-side view of cash from your home without selling can help a family prepare for that talk.