For prospective reverse mortgage borrowers, there are strengths and weaknesses to be found either in immediate or delayed leveraging of the line of credit, and the borrower’s decision concerning a package of costs should be a conscious part of the equation. This is according to the latest in a series of pieces at Forbes by Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and a member of the Funding Longevity Task Force.
When examining the benefits to be found in either a quick or delayed tapping of a Home Equity Conversion Mortgage (HECM) line of credit, there are advantages and drawbacks to either strategy. However, how a borrower plans to use it should also be a factor in deciding on the package of costs.
“Those seeking to spend the credit quickly will benefit more from a cost package with higher up-front costs and a lower lender’s margin rate,” Pfau says. “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 up-front costs for a higher lender’s margin rate.”
The origination and servicing fees, along with other closing costs and the margin rate are also detailed for readers. Some lenders may offer credits to cover associated closing costs like appraisal changes and titling, but this is not a option for the mandatory financial counseling session required for new borrowers by law. Details of the lender’s margin rate are also explained, specified as an ongoing cost charged on the outstanding loan balance rather than an upfront cost.
Those four ingredients of origination fees, servicing fees, closing costs and the margin rate, “can be combined into different packages by the lender,” Pfau says. “The best choice depends on how the reverse mortgage is used.”
For instance, an earlier extraction of funds may lend itself to an arrangement with higher upfront fees that come with a lower margin rate, but a standby line of credit that could go untapped may make a higher margin rate with lower origination and servicing fees more prudent and beneficial, Pfau details.
Find the full article and accompanying data at Forbes.