Origination Fees on Reverse Mortgages

The settlement charges on a reverse mortgage cover pretty much the same costs that are involved on a forward mortgage, but there are some differences. Instead of a list of lender charges, which can very from lender to lender, reverse mortgages have one "origination fee" which covers all lender costs.

On HECMs, the origination fee is set by regulation at 2% of the FHA loan limit, which varies by county. In 2006, loan limits ranged from $200,160 to $362,790, with corresponding origination fees of $4003 to $7256. Houses with values below the county limit would pay less than the maximum but there is a minimum fee of $2,000.

On Fannie Mae's Home Keeper program, the origination fee is 2 percent of the value of the home up to the maximum loan limit, which was $417,000 in 2006. The origination fee on a loan of that amount would be $8340.

Other Reverse Mortgage Costs Paid at Origination

HECM borrowers must pay FHA an upfront mortgage insurance premium of 2% of the lower of home value and the maximum loan limit, and an annual premium of 1/2 percent of the loan balance. Other upfront fees cover title insurance, appraisal, credit report, flood certification, document preparation, closing, property survey and pest inspection. For more detailed information on these costs, see http://www.reversemortgage.org/.

None of the upfront costs are out-of-pocket, they can all be included in the loan amount. But a chunk of the borrower's equity is used up in the process, which makes the transaction very expensive if it terminates within a short period.

Servicing Costs

Borrowers pay a monthly charge of $30-35 to cover the cost of servicing. In addition, to assure that there will always be enough equity in the property to cover servicing costs, a sum of money is earmarked for servicing at the outset of the transaction. Called a "set-aside", the loan limit used in calculating the credit line or annuity is reduced by that amount.