Fees Associated With a Reverse Mortgage

I’ve been sharing some basics about the reverse mortgage, because I know it can be a lot to take in.  If you’re thinking about one (like me), there are a lot of things to consider.  

I’ve already learned that a reverse mortgage is a loan using the equity in my home.  With a reverse mortgage, the bank makes payments to me (on the terms I choose).  I need to be at least 62 years old, and live in my house as my primary residence.  

Sound reasonable so far.  But I wanted to make sure that I asked about the “fine print” if you will.  I wanted to learn the rules that govern a reverse mortgage.  

Here are 3 things I learned:

1. The Federal Housing Administration (FHA) offers mortgage insurance on loans through FHA-approved lenders
2. The FHA reverse mortgage is also called Home Equity Conversion Mortgage (HECM), and it is the most common type of reverse mortgage
3. The mortgage insurance offers protection to the lender (the bank)

Understanding the dollars and cents, and the risk and benefits to the lender, actually helped me become more confident on reverse mortgages.

While the bank pays the borrower with a reverse mortgage, there are still fees involved in this type of mortgage.  Remember, a reverse mortgage is a loan.  There are origination fees, insurance premiums (both up-front and ongoing), servicing fees, and interest.  However, this does not mean that I had to write a check to the bank in order to start a reverse mortgage - all of these fees are rolled into the loan.  So while this might not be a physical out-of-pocket expense, these fees are ultimately part of your loan.

Why is the mortgage insurance through the FHA such a big deal?  Why do lenders include this into my loan?  This is really about protecting the lender when the loan becomes due and payable (more on this here [insert link to blog post 3]).  Here’s an example of where this becomes part of the equation…

If I have a reverse mortgage and pass away, my children may elect to let the bank sell my home (my children are not responsible for my reverse mortgage loan).  The housing market can do some crazy things, so there’s always a chance that when the bank sells my house, they sell it for less than the amount of the loan.  In this instance, the FHA insurance will help the bank stay whole.  This is why that mortgage insurance is required for HECM loans.