Buyer's beware: reverse mortgage will carry a much higher closing cost than a typical home equity loan. You can easily pay 4-5% of the loan principal before you get a dime. (And that's why the government will require you take a mandatory consultation session before you sign the dotted line.)

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 90 percent of all reverse mortgages made in the U.S., the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount (i.e., county FHA loan limit). Currently, the FHA loan limit varies from a low of $200,160 (for rural areas) to a high of $362,790 (for high-cost metropolitan areas). Therefore, the 2 percent origination fee generally ranges between $4,003 (2 percent of $200,160) and $7,256 (2 percent of $362,790).

Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the value of the home. With either product, the entire amount of the origination fee may be financed as part of the mortgage.

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.