How the Lender Makes Money
The lender or the party that ends up owning the note on the reverse mortgage will earn the interest that accumulates on the balance of the loan. From a lender's point of view, it could be a long time until the payoff arrives from this portion of the cost of a reverse mortgage. The bulk of the earnings for the company making the reverse mortgages is from the upfront fees.
The fees on a reverse mortgage can be as much as five to six percent of the value of the home. The major types of fees to close a reverse mortgage are the origination fee, mortgage insurance and various fees to record the mortgage. The origination fee is the primary source of income for the lender on a reverse mortgage.
For a regular mortgage to purchase or refinance a home, the most common size of the origination fee is one percent of the loan amount. For a reverse mortgage, the lender will charge two percent or more, and the origination fee will be based on the value of the home, since the final amount of a reverse mortgage may not be known.
The FHA HECM program puts a limit on the amount a lender can charge as an origination fee. FHA rules use a percentage of the loan amount to calculate the fee, but the minimum fee is $2,500 and the maximum is $6,000. This is the answer to how do reverse mortgage companies make their money on your house.