Lower Upfront Fees or Lower Interest Rate?

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One of the many benefits of reverse mortgages is that each one is customized to fit the borrower’s specific situation. This is also true in balancing the
upfront fees against the interest rate.

In some situations, a borrower can lower the upfront costs involved with originating a reverse mortgage by agreeing to a slightly higher interest rate.
On the flip side, if they agree to higher costs, the borrower can sometimes receive a lower interest rate.

In a recent article published in Forbes, Wade Pfau, professor of retirement income at The American College, and principal at McLean Asset Management, discusses
the various cost versus rate combinations available to reverse mortgage borrowers and how they might impact the amount of proceeds received.

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 says, can be combined into different packages by the lender.

“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 oppor-tunities with a package of costs that
trades lower upfront costs for a higher lender’s margin rate.

“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.”

One of the benefits with working with an experienced reverse mortgage specialist is that I can work up both scenarios so you can compare which is best
for your specific situation.


Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

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