For this post, we will cover the costs of the HECM mortgage. While the up front costs are significant, the borrower may choose to finance the large majority of these costs as part of the initial borrowings for the reverse mortgage, and as we will detail, a main reason for the driver of these costs is the non-recourse nature of the loan and protections provided to the borrower for the life of the loan.

Closing costs for a HECM mortgage loan include 1) the federally mandated mortgage insurance premium, or MIP; 2) an origination fee; and 3) closing costs incurred generally for all mortgage loans. Let’s discuss each in a little more detail:

Mortgage insurance premium – this is a federally mandated premium that is paid to the federal government, which covers the guarantees provided by the FHA to the lender and the borrower. For the borrower, this guarantees that the borrower has access to the contractual principal limit (including the growing line of credit), even if the lender encounters difficulty. For the lender, this insurance covers the non-recourse nature of the loan, such that if the principal amount owed on the loan at the time of required repayment is greater than the value of the home, the government’s insurance fund will make up the difference for the benefit of the lender. This fee is set currently at 2% of the home value up to the current $1,209,750 FHA lending limit.

Origination Fee – a lender may charge a one-time origination fee of 2% of the first $200,000 of a borrower’s home’s value, plus 1% of the amount over $200,000, capped at $6,000 in total.

General closing costs – these are closing costs that are generally common to all mortgage loans, and can include third-party costs incurred related to a property appraisal, title search and lender’s title policy, recording fees, survey, escrow, recording and other miscellaneous services provided in connection with the closing of a mortgage loan.

While most of these costs can be rolled into the loan at closing, and so out-of-pocket costs can be minimized, it is important to note reverse mortgages are part of a thoughtful, long-term financial plan for retirement, and should not be entered into for purely short-term needs.

In our final installment of this series, we will provide an overview of the process for obtaining a reverse mortgage, and important information you will need to know as you move through that process and evaluate your options.