A reverse mortgage contains several types of fees:
- An application fee covers an appraisal of the residence and a credit check. This is often the only expense the homeowner must pay in cash. The remaining fees are usually financed as part of the loan, which adds to the outstanding mortgage balance (and reduces the principal amount that remains available to the homeowner).
- An origination fee covers the lender's expense to prepare and process the reverse mortgage.
- The insurance that guarantees the loan disbursements is financed by a premium charged to the borrower. This premium also protects the borrower and the bank should the value of the home go below the balance owed on the reverse mortgage.
- The lender may also charge a monthly service fee. If this fee is financed as part of the loan, the lender initially reduces the amount available to the homeowner by a predetermined amount. As the fee is earned, the monthly amount is added to the homeowner's outstanding loan balance.
- Interest costs. Adjustable interest rates can't increase more than two percentage points a year or more than five percentage points over the life of the loan. Lenders may also offer a monthly adjustable rate which may be a lower rate. This monthly rate is only limited over the life of the loan by a cap of a certain number of percentage points above the original rate. Many borrowers use the monthly adjustable loan, where the interest rate has a 2% annual cap and a 10% lifetime cap.
- Other closing costs may vary by state or area, and by the value of the property.