Understanding the Monthly Servicing Fee
Key Takeaways
- The servicing fee pays the company that manages your loan statements and line of credit.
- FHA rules cap the maximum fee at $30 to $35 per month.
- Due to intense market competition, most modern lenders do not charge a servicing fee.
When reading through the dense legal disclosures of a Home Equity Conversion Mortgage (HECM), you may notice a line item mentioning a "Monthly Servicing Fee."
For seniors who are taking out a reverse mortgage specifically to eliminate monthly payments, seeing a new monthly fee can be alarming.
What Does the Servicer Do?
The company that originates your loan (the broker or the bank) rarely holds onto it. They sell the loan to a massive Wall Street aggregator, who then hires a "Servicing Company" to manage the day-to-day operations of the loan for the next 20 years.
The servicer's job is highly complex: - They must mail you monthly statements showing your compounding interest. - They must process your requests when you want to draw cash from your line of credit. - They must monitor your county property tax records to ensure you aren't delinquent. - They must process your annual occupancy certificate.
The monthly servicing fee is designed to pay this company for their ongoing administrative work.
The FHA Cap
Because the FHA heavily regulates the reverse mortgage industry, they place a strict limit on how much a servicer can charge you: - $30 per month for loans with a fixed interest rate or an annually adjusting rate. - $35 per month for loans with a monthly adjusting rate.
Crucially, you do not write a check for this fee. The $30 is simply added to your loan balance every month, compounding with the rest of your interest.
The Good News: The Fee is Disappearing
In the early 2000s, almost every reverse mortgage charged a servicing fee.
Today, the industry is incredibly competitive. To win your business, the vast majority of modern lenders waive the servicing fee entirely. They have realized that the margin they make on the interest rate is more than enough to cover the administrative costs.
If you receive a Good Faith Estimate from a lender and it includes a $35 monthly servicing fee, you should absolutely demand they remove it, or tell them you will take your business to a competitor who does not charge one.