The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

The amount of available proceeds you can qualify for under the HECM program depends on your age, appraised home value, and current interest rates. The older you are, and the more valuable your home (and the less you owe on your home), the more funds you qualify for.

The maximum loan limit is $625,500. Simply put, if your home is worth more than $625,500, the amount of equity you are eligible to receive will be based on $625,500. If your home is worth less, then the loan amount will be based on the lower appraised home value.

Many of the upfront fees associated with the HECM are capped by FHA. Currently, you pay a mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (the value of the home or $625,500, whichever is less), plus an annual premium thereafter equal to 0.5 percent of the loan balance. The MIP is paid directly to FHA in exchange for guaranteeing the loan.

The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.

Under the HECM program, which accounts for most reverse mortgages made in the U.S., the origination fee equals 2% on the initial $200,000 of maximum claim amount (lesser of the home value or county lending limit) and 1% on the balance thereafter with a cap of $6,000.

In addition to these two primary fees, you will also pay other standard closing costs associated with getting a mortgage, including title insurance, attorneys fees, recording taxes, etc.

Many of the same costs that someone pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs.

In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage. Below is a more in-depth explanation of each type of fee.

Origination Fee
The origination fee covers a lender's operating expenses—including office overhead, marketing costs, etc.—for making the reverse mortgage.

Under the HECM program, which accounts for most reverse mortgages made in the U.S., the origination fee equals 2% on the initial $200,000 of maximum claim amount (lesser of  the home value or county lending limit) and 1% on the balance thereafter with a cap of $6,000.

Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to 2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance.

The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.

Appraisal Fee
An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range between $300-$400.

In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made.

If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50-$75 dollars for the follow-up examination.

Closing Costs
Other closing costs that are commonly charged to a reverse mortgage borrower, include:

§  Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally under $20

§  Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally under $20

§  Escrow, Settlement or Closing fee. Generally includes a title search and various other required closing services. Cost: $150-$450

§  Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75-$150

§  Recording fee. Fee charged to record the mortgage lien with the County Recorder's Office. Cost: $50-$100

§  Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50

§  Title insurance. Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance.

§  Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100

§  Survey. Determines the official boundaries of the property. It's typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower's property. Cost: Generally under $250

Service Fee Set-Aside
The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing your account.

Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars.

(Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges from $30-$35.)

Today’s reverse mortgage programs contain numerous safety features to reassure seniors that they retain their rights as the homeowner, and they cannot put themselves, their home, or their family at any financial risk. These protections are mandated by law for the FHA HECM and by Best Practice for conventional programs.

Below is a listing of the most important consumer safeguards:

1) Independent Counseling . Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor. HUD oversees a network of counselors whose job is to review the transaction, answer questions, and suggest alternative options.

2) Standard & Capped Interest Rates

FHA HECM : You can choose either a fixed interest rate or a rate that adjusts monthly or annually (the borrower chooses). Rates are calculated on one of two indexes--the 1-year U.S. Treasury Constant Maturity Rate published weekly by the Federal Reserve, or the London Interbank Offered Rate (LIBOR)--plus a margin charged by the lender. Both the monthly and annually adjusted rates have lifetime caps. 

Conventional reverse mortgages . Most conventional programs are based on the LIBOR index, plus a margin charged by the lender.

2) Limitation on Fees . Origination fees are capped and may be financed as part of the reverse mortgage. This means a senior incurs very little out-of-pocket expense to get a reverse mortgage.

3) Advance Disclosure . Under the FHA HECM program, the Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board, is provided to the prospective reverse mortgage borrower and displays the total transaction costs over the projected life of the loan. This way, a senior is made fully aware of the costs incurred in obtaining the reverse mortgage.

4) No Maturity Date. A reverse mortgage cannot become due during the homeowner’s lifetime. It is a permanent tool. The fact that there are no required payments and there is a lifetime right to occupy the home provides great protection against unforeseen or unanticipated future circumstances, rendering reverse mortgages vastly safer than other loan alternatives.

5) No Prepayment Penalty.

FHA HECM. Although the loan is not due and payable until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.

Conventional reverse mortgages . Some programs will charge a prepayment penalty if you try to pay off the loan within the first year.

6) No Penalty for Canceling the Loan. After the loan closes, you have up to three days to cancel the transaction, the so-called “right of rescission,” for any reason whatsoever.

7) Asset Protection. What must be paid at the conclusion of the reverse mortgage is the sum of the actual funds received or advanced for fees, plus the accrued interest. In no event will the repayment amount exceed the value of the home, as long as the property is sold to pay back the reverse mortgage. If a decision is made to keep the home, then the pay-off amount would equal the total balance on the account.

8) No Shared Appreciation . No reverse mortgage product in the marketplace has “equity-sharing” or “shared appreciation” features. In some earlier reverse mortgage products, the senior could obtain more money in exchange for giving up a percentage of the future value of the home. Such products are no longer offered.

All reverse mortgages—whether the government-insured Home Equity Conversion Mortgage or a conventional product—share a set of common characteristics, which include the following:

§  You must be at least 62 years old and own a home. (Note: There are some conventional reverse mortgages that have differing age requirements.)

§  You ALWAYS retain title (ownership) to the home. The lender never, at any point, owns the home, even after you (or last surviving spouse) permanently vacate the property.

§  You must still pay property taxes and insurance, and keep the home well maintained. If you are unable to pay your property taxes and insurance, then a special set-aside from your reverse mortgage can be created.

§  Repayment of the loan occurs when you (or last surviving spouse) permanently vacate the home. You or your heirs (estate) then must facilitate the pay back of the loan using either private funds or selling the home. After the loan is repaid, all leftover proceeds from the sale of the home go to you or the estate.

§  The amount of funds you are eligible to receive depends on your age (or age of the youngest borrower in the case of couples), the value of the home, the interest rate and the upfront costs. With the HECM product, the county lending limit is a factor. With all products, the older you are, the more proceeds you are eligible to receive.

§  Loan fees can be financed, or paid out of the available loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. In most cases, you only have to pay for the appraisal, which costs roughly $350 depending on your market.

§  The loan balance (amount owed) grows each time you access funds from your line of credit or receive a monthly payment. In addition, the lender is charging you interest on the outstanding loan balance as well as a monthly servicing fee.

§  Repayment of the loan is not required until you (or the last surviving spouse) permanently leave the home as a primary residence. For the HECM program, you can live up to 12 consecutive months outside the home, but this may vary for other products.

§  All reverse mortgages have a "non-recourse" feature, which means that the total amount owed can never exceed the appraised value of the home, as long the home is sold by the borrower or heirs to pay back the loan. If the amount owed exceeds the home's appraised value, then the lender or the federal government (in the case of the HECM product) will absorb that loss.