Forbes: Choosing a Reverse Mortgage Cost Package

Reverse mortgages come equipped with a variety of product features and payment options designed to accommodate any borrower’s preferences. As shoppers search for the right Home Equity Conversion Mortgage (HECM) for their particular situations, they must also consider the package of costs that will work best for them, according to a recent Forbes article.

In his latest reverse mortgage article published by Forbes, Wade Pfau, professor of retirement income at The American College, and principal at McLean Asset Management, examines the various types of cost combinations available for prospective reverse mortgage borrowers and how they might impact the amount of loan proceeds that can be received.

Whichever cost combination a borrower chooses depends on how he or she plans to use a reverse mortgage, particularly the line of credit option.


“Those seeking to spend the credit quickly will benefit more from a cost package with higher upfront costs and a lower lender’s margin rate,” Pfau writes. “Meanwhile, those seeking to open a line of credit that may go unused for many years could find better opportunities with a package of costs that trades lower upfront costs for a higher lender’s margin rate.”

Pfau provides an overview of the various reverse mortgage costs, including origination fees, servicing fees, the lender’s margin rate and other closing costs associated with the loan.¬†These four “ingredients,” he writes, can be combined into different packages by the lender.

“Which version is best depends on how the reverse mortgage is to be used,” Pfau writes. “When funds will be extracted earlier, it may be worthwhile to pay higher upfront fees coupled with a lower margin rate. However, for the standby line of credit, which may never be tapped, it is beneficial to lean toward a higher margin rate combined with a package for reduced origination and servicing fees.”

Read more at Forbes.

Written by Jason Oliva

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  • I may be a bit confused on Wade Pfau’s comment and analogy, which, I do stand to be corrected.

    What is confusing me is will there be that great of a difference choosing a lower margin, paying higher closing costs for those who spend the line quickly, verses those that pay lower costs and a bit higher margin in order to let the line sit there longer?

    I can’t see the benefit of it and each case is different, is there a lien to be paid off, is the house free and clear ETC.?

    Also, what is quickly? Remember, this will be an ARM, the 60% rule the first year comes into play and there are many other factors to look at.

    If one of my colleagues can tell me if I am looking at this the wrong way, I would be very open to be straightened out and would appreciate it.


    John A. Smaldone

    • John,

      Your questions no doubt arise from your unfamiliarity with exponential math and its specific application to cash in 1) present and future value, 2) discounted cash flows, 3) annuity type, and 4) sinking fund computations.

      Exponential math is the foundation in computing LESAs, servicing fee set asides, balances due, principal limits, and even principal limit factors. Many want to use the principles of this type of math to compute the available line of credit as well but do not seem to understand when that is appropriate and totally inappropriate. Exponential math is the underpinning for compounding.

      Part of the problem is a lack of realization that HECM proceeds are nothing more than cash thus allowing HECM analysts to use the aforementioned applications in determining how costs impact various HECM proceeds strategies including accruing costs as well as upfront costs. Then based on the results, one can select the course of action that will produce an acceptable result at the least cost.

      Paying off mortgages and other liens is helpful and increased cash flows can be determined from that but unfortunately what is lost too many times in that conversation is the length of that increased cash flow. For example, there is a huge difference of lowering cash outflow by $1,000 per month for just two months or for 358 months. The length of time that cash flow is increased by paying off required payments is extremely meaningful in evaluating the use of HECM proceeds. If the required payments would be paid off in two months anyway, how meaning is an increase of cash flow of $1,000 per month? Not as meaningful as if that same cash flow increase was for 358 months. Just remember if the borrower continued paying off the mortgage for the next two months when it will be paid off in full, then paying off the mortgage now will increase cash flow by $1,000 for ONLY two months, since making payments for the final two months would have made cash flow go up by $1,000 for every month thereafter anyway.

      Enjoy your weekend — 3:49pm (PST) 3/11/2026

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