How to Negotiate Reverse Mortgage Origination Fees
Key Takeaways
- FHA law caps the origination fee at $6,000.
- Lenders will often waive the origination fee entirely in exchange for a higher interest rate.
- Always get Good Faith Estimates from at least three different lenders to force them to compete.
A reverse mortgage is a specialized financial product, and the loan officers who originate them expect to be compensated for their time and expertise. This compensation comes in the form of an Origination Fee.
Unlike the FHA Mortgage Insurance Premium, the Origination Fee is entirely negotiable.
The FHA Legal Cap on Origination Fees
To prevent predatory lending, the federal government placed strict mathematical limits on how much a lender can charge you to originate a HECM.
The formula is: - 2% of the first $200,000 of your home's value. - 1% of the remaining value. - Absolute Maximum Cap: $6,000. - Absolute Minimum: $2,500.
If you have a $300,000 home, the maximum fee is $5,000. If your home is worth $500,000 or more, the fee hits the hard $6,000 cap.
How to Negotiate the Fee to Zero
While $6,000 is the legal maximum, very few savvy borrowers actually pay it.
The reverse mortgage industry is highly competitive. If you present a lender with a competing quote from another bank, they will almost always negotiate.
The most common negotiation tactic is the Lender Credit.
The lender will offer to waive your $6,000 origination fee entirely. In exchange, you agree to accept a slightly higher interest rate on your loan (for example, taking a 7.5% rate instead of a 7.0% rate).
Because the lender makes more money on the back-end over time through the higher interest rate, they are willing to absorb the upfront cost of the origination fee.
If you plan to live in the home for 20 years, taking the higher rate is mathematically worse in the long run. If you only plan to live in the home for 3 years, wiping out the $6,000 upfront fee via a higher rate is a brilliant mathematical move.