One primary requirement for any HECM refinance is meeting the refinance benefit factor. Simply put, your benefit from the refinancing should be five times more than the costs associated with the refinance. Refinancing your existing Home Equity Conversion Mortgage can be costly and would thus not make sense if these costs outweigh the benefits.
So, let’s go over the pertinent costs and fees associated with an HECM refinance.
HECM Refinance Costs
In general, costs associated with HECM refinance and purchase transactions are pretty similar. But because an HECM refinance entails a new loan, the calculations will vary. In addition, the lender may charge finance costs other than the mandatory fees so always ask them beforehand.
Closing costs and other fees can be financed into the loan. But doing so could decrease your total loan amount.
HECM Refinance Costs at the Onset of the Loan
1. Origination Fee: This is what the lender charges for processing your refinance application. The lender charges 2% or $2,500, whichever is greater, for the first $200,000 of the home’s value plus 1% for any home worth more than $200,000. Notwithstanding this guidance, the FHA caps the origination fees to be charged at $6,000 regardless of the value of the property.
2. Upfront MIP: The FHA guarantees that the lender will be repaid in the event of default and that you will be able to receive loan disbursements under your HECM. To do that, you have to pay a mortgage insurance premium which is to be paid upfront and annually.
The initial MIP for HECM refis is lower and calculated as the difference between the initial MIP on the existing HECM and the initial MIP on the new loan. If the result is positive, the amount may be used toward the initial MIP of the refi loan.
3. Closing Costs: This is a collection of fees for third-party services required to underwrite and close your loan. The most pertinent fee relates to the appraisal, which is a standard in any refinance transaction. Appraisal fees could cost $450 on an average.
Other closing costs are credit report fee, title insurance fee, lien recording fee, documentation preparation fee, and local fees that vary among states.
HECM Refinance Costs As the Loan Progresses
1. Annual MIP: This is the annual component of the MIP and is charged every month. The annual MIP is often 1.25% of your total loan balance.
2. Property Taxes and Homeowner’s Insurance: Taxes and insurance payments (different from the MIP) are required for the HECM to remain current. Home maintenance is an important aspect of the HECM because neglecting these obligations could lead to foreclosure.
3. Servicing Fee: The loan servicer, who is in charge of your loan account, charges you when sending out your loan proceeds and monthly statements, and monitoring whether you’ve been timely with your insurance and property tax. The servicing fee may be $35 or lower depending on the kind of interest rate you have. A servicing set-aside is established at closing to account for expected fees to be incurred.
Your interest is another ongoing cost on your loan. Traditional forward mortgages require that you pay principal + interest + taxes + insurance every month or PITI.
But under reverse mortgages, you will be one to receive principal payments every month, as applicable. You’ll start paying for the principal and interest when the HECM becomes due and payable.
It all boils down to knowing whether you stand to gain when you do an HECM refinance. By understanding these costs, you are a step closer to making an informed decision.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
