Mitigating costs on a HECM
There is no getting around the fact that an FHA-insured reverse mortgage (AKA Home Equity Conversion Mortgage or HECM) can be an expensive loan. Nonetheless, it is a mortgage, and like all mortgages, there are strategies for mitigating up-front costs. I say “mitigate” rather than “eliminate” because, like any mortgage loan, you cannot eliminate the costs, you can only change their form. In essence, this means paying up front or paying as you go.
There are three ways you can pay for closing costs on any mortgage loan, including a HECM:
Pay up front and out of pocket – This method may seem to be the most expensive, but in many cases, it will actually cost you the least over time. This is because you have the most negotiating power when you are willing to pay costs out of pocket. You’re likely to get the lowest rate as well as to be able to negotiate the lowest costs because they’re all out in the open where they’re easy to see and where a lender will be more hard-pressed to explain them if they are excessive or unnecessary.
Pay up front and finance them into the loan – This is the second least expensive way to mitigate costs. As in the previous paragraph, you’ll likely get the lowest possible rate and all the costs will be exposed and subject to scrutiny and negotiation. The benefit to doing it this way is that you don’t have to put up the money yourself. The downside is that you will be paying interest on the amount of costs that are financed, which is not the case if you pay them out of pocket.
Roll the costs into the rate – This method consists in raising the interest rate to compensate for lowering the costs. The idea is that the lender will recoup the costs over time in the form of accrued interest. The downside is that interest will continue to accrue and compound for the life of the loan, and over time this accrued interest can far exceed the amount of the actual closing costs.
Lastly, there are proprietary reverse mortgage programs available which do not require mortgage insurance. Since the Up-Front Mortgage Insurance Premium on a HECM is generally one of the largest expenses, you may be able to significantly reduce the cost of obtaining a reverse mortgage by applying for a proprietary program rather than a HECM.