Origination Fee
An origination fee pays a lender for preparing your paperwork and processing your loan, also known as “originating” a loan. If your home is worth less than $125,000, a lender can charge up to $2,500 for this fee. If it is worth more than $125,000, the fee is limited to 2% of the first $200,000 of your home’s value plus 1% of any amount over $200,000, up to an absolute limit of $6,000. On a $250,000 home, for example, the origination fee limit would be $4,500 (2% x $200,000 = $4,000 plus 1% of $50,000 = $500).
Origination fees vary from one lender to another, so it can pay to shop around. The amount of this fee may also be negotiable with a lender.
Third-Party Closing Costs
A “closing” is a meeting at which legal documents are signed to “close the deal” on setting up a mortgage. The date of closing is the day on which a mortgage begins. Closing a mortgage requires a variety of services by third parties other than the originating lender. These services
include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks, and others.
Third-party closing costs on a HECM loan vary with the value of the home and from one state or area to another. However, all the HECM lenders in a given area are likely to charge about the same closing costs on any specific loan. The total of all these costs generally ranges from about $2,000 to $3,000, although they are substantially higher in some areas.
A lender may require a cash application fee to pay for an appraisal and minimal credit check. Some will refund this fee to you. Others will apply it to your origination fee or third-party closing costs.
Mortgage Insurance Premium (MIP)
HECM insurance is financed by an MIP charged on all HECM loans. The cost, which may be financed with the loan, is charged in two parts:
• 2% of your home’s value (or 2% of HUD’s home value limit, whichever is less) is charged “upfront” at closing; and
• 0.5% is added to the interest rate charged on your rising loan balance.
HECM insurance guarantees that you will receive your promised loan advances, and not have to repay the loan for as long as you live in your home, no matter:
• how long you live there;
• what happens to your home’s value; and
• what happens to the lender from whom you got your loan.
The MIP also guarantees that your total debt can never be greater than the value of your home if it is sold to repay the loan.
It makes it possible for you to keep getting your monthly loan advances or growing credit line as promised even if:
• you live much longer than others your age;
• your home’s value grows very little, not at all, or declines; or
• your loan balance catches up to and then is limited by the value of your home.
As a government program, HECM insurance does not generate a profit. The premiums paid by all borrowers are used to continue making loan advances to and limit the amount owed by the borrowers who live the longest and whose home values grow the least or decline.
The MIP is a substantial cost. The upfront portion on a $250,000 home, for example, would be $5,000. The cost of the 0.5% added to the interest rate depends on how much money you borrow, when you borrow it, and the interest rate on the loan. For a 75-year-old borrower living in a $250,000 home, who borrows one-half of the maximum loan amount at closing at an expected rate of 7%, the cost during her remaining life expectancy (12 years) would be about $7,900.
Servicing Fee
“Servicing” a loan means everything lenders or their agents do after closing it, including making or changing loan advances at your request, transferring insurance premiums to FHA, sending
account statements, paying property taxes and insurance from the loan at your request, and monitoring your compliance with your obligations under the loan agreement.
FHA limits the servicing fee to $30 per month if the loan has an annually adjustable interest rate, and to $35 if the rate is monthly adjustable (see below). But the amount of this fee can vary from
lender to lender within these limits. So it can pay to shop around. To finance this fee with the loan, a lender is required to “set aside” a prescribed dollar amount* and deduct it from your
available loan funds. But this total amount is not added to your loan balance. Instead, the monthly fee is added to your loan balance each month.
The total amount actually paid in servicing costs depends on the amount of the monthly charge plus how long it is paid. For a 75-year-old borrower who pays $35 per month for her remaining life expectancy (12 years), that cost would be $5,040.
On traditional “forward” mortgages, the cost of servicing is added to the interest rate. So you may not have seen this fee before—but you’ve paid it.
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