Key Takeaways
- A lender credit is money the lender gives you to cover your upfront closing costs.
- You receive this credit in exchange for accepting a higher interest rate.
- It is highly beneficial if you only plan to keep the reverse mortgage for a few years.
\n\nIf you are shopping around for a reverse mortgage, you might encounter a loan officer offering you a "zero closing cost" or "no origination fee" loan. Given that reverse mortgages are notorious for high upfront costs, this sounds too good to be true.
Usually, this is achieved through a financial mechanism called a Lender Credit.
How a Lender Credit Works
In the mortgage industry, interest rates and upfront costs are inversely related.
If you want the absolute lowest interest rate possible, you have to pay all the upfront fees (origination, title, appraisal, etc.).
If you do not want to pay those upfront fees, the lender will pay them for youā€”but they will charge you a higher interest rate on the loan to recoup their money over time. This tradeoff is the lender credit.
The lender is essentially saying: "We will give you a $6,000 credit today to cover your origination fee, but in exchange, your interest rate will be 7.5% instead of 6.5%."
The Mathematics of the Tradeoff
Deciding whether to take a lender credit comes down to one primary factor: How long do you plan to keep the loan?
Because a reverse mortgage is a negatively amortizing loan (meaning the balance grows over time), a higher interest rate causes the debt to compound faster.
Scenario A: Short-Term Horizon (1 to 5 Years)
If you are getting a reverse mortgage as a short-term bridgeā€”perhaps you plan to sell the house in three years and move to an assisted living facilityā€”taking the lender credit is usually the smartest move. The extra interest accrued over just three years will likely be far less than the $6,000 to $10,000 you saved upfront in closing costs.
Scenario B: Long-Term Horizon (10+ Years)
If you are 65 years old and plan to stay in the home for the rest of your life, taking the lowest interest rate and paying the upfront fees is usually better. Over a 20-year period, a 1% higher interest rate on a large loan balance will cost you tens of thousands of dollars in compounded debt, far exceeding the initial savings of the lender credit.
How to Compare Offers
When comparing loan estimates from different lenders, you must look at both the upfront costs and the interest rate margin. - Lender A might offer a $0 origination fee but a 3.0% margin. - Lender B might charge a $5,000 origination fee but offer a 2.0% margin.
Ask your loan officer to run an amortization schedule for both options showing what the loan balance will be in 5, 10, and 15 years so you can visually see the breakeven point.\n