How Much Does a Reverse Mortgage Cost?

Older homeowners can turn home equity into a source of income using a reverse mortgage. No monthly payment is required and the loan balance isn't due until after the borrower is no longer living in the home.

Upfront costs, which can be $10,000 and up, are usually added to the loan's balance. Similarly, ongoing costs like interest, monthly service fees, and mortgage insurance premiums are also added to the loan. Even though you won't see them, these are costs you (or your heirs) will have to cover when it is time to repay the loan.

Understanding how much a reverse mortgage costs is a crucial part of deciding whether it's the best option for you. Let's walk through the typical reverse mortgage fees that you can expect.

How Much a Reverse Mortgage Costs

Reverse mortgage costs largely depend on your home’s value. Fortunately, FHA maximums can limit the fees on certain reverse mortgages.

Upfront Costs

One-time upfront fees can be paid cash at closing or they can be taken out of your available funds. Covering fees with the loan reduces your available funds.

• Mortgage insurance premium: 2% of the loan amount, if you're getting a home equity conversion mortgage (HECM)—the most common type of reverse mortgage
• Origination fee: $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000, whichever is greater, up to $6,000
• Third-party fees: These vary and include closing costs like fees for title search, title insurance, attorney fees, recording fees, and other costs.

Ongoing Costs

Additional costs are charged on the reverse mortgage and the home—these costs are added to the loan’s balance.

• Interest: Varies based on your interest rate and balance
• Mortgage insurance premium: In addition to the MIP you'll pay at origination, you'll pay 0.5% of the outstanding mortgage balance annually
• Taxes, maintenance, insurance: Based on your finances, you may pay these costs yourself or the lender may set aside some or all the payments using your reverse mortgage funds
• Monthly servicing fee: Up to $30 if the interest rate adjusts annually and up to $35 if it adjusts monthly

How HECM Reverse Mortgage Payouts Are Calculated

If you're borrowing an HECM reverse mortgage, the payout amount is calculated based on HUD requirements and how you opt to receive payments.

Factors That Affect Payout Amount

Your exact payout amount is calculated based on HUD guidelines, which consider a few factors:

• Age of the youngest borrower: Payout amounts are lower for younger borrowers. If you're married or co-borrowing, the payout is based on the age of the youngest borrower. 
• Appraised home value: The payout amount is calculated based on the current home value or the mortgage limit for that area, whichever is lower, up to the HECM FHA maximum of $1,089,300.
• Current interest rates: Higher interest rates mean a lower payout amount.

Reverse Mortgage Payout Example

Consider a 66-year-old borrower who lives in a $467,000 home with 95% equity—$443,650—and expects an 8% interest rate. We'll assume the house value is lower than the maximum mortgage limit for that area. Based on the borrower's equity, age, and interest rate, the initial principal limit would be $185,002 using the Factors for Determining Borrower's Principal Limit table.

Estimated upfront fees include an origination fee of $6,000, the initial mortgage insurance premium of $3,700, and closing costs.

Payout Options

Once your borrowing limit is determined, you have several options for receiving your money.

• Lump sum payment: You'll receive all the available funds at once. Closing costs may be more expensive since interest and fees are paid on the entire loan amount.
• Line of Credit: You can choose the timing and amount of your payments and only pay interest on the amount you use. Combining the line of credit option with monthly payments may give you more flexibility. 
• Monthly payments: You'll receive a set payment each month as long as at least one borrower lives in the home as their primary residence. You can either receive fixed monthly payments for a set number of years or for as long as you maintain the reverse mortgage and the balance doesn't exceed the amount stated in the mortgage.

Understanding the Impact of Costs on Reverse Mortgages

While reverse mortgage costs can be delayed, this can make it difficult for heirs to keep the home, particularly if they don't have enough assets to pay off the loan.

Cost Comparison

Consider a home equity loan, which is another option for taking advantage of your home equity. A home equity loan gives you access to all the funds upfront, but you'll have to make monthly payments based on your loan, interest rate, and term.

As long as your payments exceed your interest, your balance shrinks over time. By comparison, a reverse mortgage doesn't require payments, so the balance grows.

Depending on the lender, you may not have upfront costs with a home equity loan. Many banks nix the origination fee and some even pay your closing costs for you.

Loan Repayment

Reverse mortgages usually have to be repaid when you no longer live in the home. Repayment might also be required if you fail to pay tax and insurance or fail to make repairs.

Usually, selling the home is the best repayment option. The money from the sale can be used to pay off the loan and your heirs can keep the difference. Or, if the home isn't worth enough to cover the loan, it can be sold for 95% of its appraised value. The mortgage insurance takes care of the remaining balance.

Your heirs have the option of keeping the home instead of selling it. They'll have to pay off the loan or 95% of the appraised value, whichever is less.

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