Forbes: The Upfront and Ongoing Costs of a Reverse Mortgage

Prospective reverse mortgage borrowers looking to determine if the product is right for them can find a series of new pieces offering information on the upfront costs (origination fee, mortgage insurance premium and closing costs), ongoing costs related to the accrual of interest, spending options for a variable-rate Home Equity Conversion Mortgage (HECM) and details on the growth of a HECM line of credit in a series of new articles at Forbes.

Dr. Wade Pfau, a principal at McLean Asset Management, member of the Funding Longevity Task Force at the American College of Financial Services (where he also serves as a professor of retirement income), and who has researched widely on the topic of reverse mortgages, authored a series of articles at Forbes in December and January related directly to the costs associated with taking out a HECM.

Taking a holistic look at the costs associated with taking out a HECM in the short- and long-term, Pfau’s first piece gives potential borrowers an idea of what to expect when taking out a HECM loan.

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Pfau recommends that prospective borrowers, “should plan to stay in [their] home long enough to justify payment of any up-front costs,” especially considering that some concessions in initial counseling and origination fees offered by originators prior to the October, 2017 changes in principal limit factors (PLFs) are no longer feasible.

Ongoing credit and costs associated with a reverse mortgage were examined next, with Pfau detailing that interest outside the loan balance and servicing fees tend to account for an ongoing financial commitment related to a HECM loan.

“I have previously felt that if the option to open a line of credit and leave it unused for many years grew in popularity, further changes might be needed to keep the mortgage insurance fund sustainable,” Pfau said. “One intended purpose for the new October 2017 rules was to accomplish this by reducing the likelihood that the principal limit grows larger than the value of the home.”

The spending options from a variable rate HECM are detailed by Pfau in a third piece at Forbes, showing prospective borrowers their options related to the ways in which they can receive a loan’s proceeds. He explains the differences between lump-sum, tenure and term payments, as well as the particulars for how they and a line of credit is calculated.

Pfau also provides light commentary detailing possible spending strategies for prospective borrowers, and how they can affect the calculations of available remaining proceeds from the full value of the borrower’s property.

Finally, Pfau details why and how a HECM line of credit can grow, including the equation that determines the principal limit, and why the growth of credit can be an invaluable tool for those looking to maximize their financial resources in retirement.

“The line of credit happens to grow at the same rate as the loan balance, and, if left unused, it can grow quite large,” Pfau says. “There was probably never an expectation that such open lines of credit would just be left alone for long periods. However, the bulk of the research on this matter since 2012 suggests that this sort of delayed gradual use of the line of credit can be extremely helpful in prolonging the longevity of an investment portfolio.”

Find all of Dr. Pfau’s commentaries concerning the associated costs, spending strategies and line of credit information at his Forbes author page.

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