How Does A Reverse Mtg Make Money

So,how do banks make money on reverse mortgages? This question pops up every now and then and usually follows a statement along the lines of this sounds too good to be true! This is a perfectly understandable reaction. The reverse mortgage often does sound too good to be true (even though it isn't!) and seniors like to know what's in it for the bank.

In short, reverse mortgage lenders mainly make money on the interest, just like any other mortgage. There's a little more to it than that, but let me cover a few basics first. The reverse mortgage is a highly misunderstood loan product, so let's make sure the record is set straight on what they are and how they work.

First, the basics

First of all, a reverse mortgage is simply a type of home loan. The most common reverse mortgage program in the United States today is the HECM (often pronouncedheck-umby industry professionals), which stands forhome equity conversion mortgage. If somebody you know recently got a reverse mortgage, it's likely they got a HECM.

The HECM program was signed into law by President Reagan as part of the Housing and Community Development Act of 1987. Today, it's overseen and regulated by the Federal Housing Administration (FHA) under the authority of the Department of Housing and Urban Development (HUD).

The HECM is designed to give seniors 62 years of age or older access to a large portion of their home's value without a mortgage payment or giving up ownership of the home. As long as at least one borrower is living in the home and paying the required property charges, no mortgage payments are required.

Many seniors use the proceeds to get rid of mortgage or other debt payments, supplement income, finance home improvements, or add to existing liquid retirement assets. HECM proceeds can be used for just about anything.

Because the HECM is a mortgage, interest accrues on the borrowed money just like any other mortgage. However, no payments are required. Any unpaid interest simply accrues onto the loan balance over time.

HECM interest rates are usually pretty comparable to traditional 30-year mortgage rates.

How do banks make money on reverse mortgages?

The short answer is that banks make money on the interest that accrues onto the loan balance. However, there are a few other ways that banks can make money:

Origination fees – Depending on market conditions and loan amount, the lender may charge an origination fee to do the loan. The amount is usually a percentage of the loan amount or home value and cannot exceed $6,000. Origination fees typically don't have to be paid out of pocket unless you're purchasing a home with a HECM.
Secondary market – Many lenders sell their loans to secondary market investors, who pay a certain premium for the loans. This is advantageous for lenders because it allows them to recoup capital that can be used to make new loans. This model also works well for investors because they don't have to go through the trouble of writing the loans, they can just put up the capital to finance them. This model is very common in the mortgage industry for both reverse mortgages and traditional "forward" mortgages and helps keep interest rates low.

So,how do banks make money on reverse mortgages? Basically, it comes from three places: interest, origination fees, and secondary market premiums.

I hope this helps!

Check out our free reverse mortgage calculator

How much can you get from a reverse mortgage? Check out our free HECM reverse mortgage calculator. It's simple to use, fast, free, and no contact information is required. You can access the reverse mortgage calculator here. Our HECM for purchase calculator can be found here.

Updated for 2021: The Reverse Mortgage Revealed

The reverse mortgage is a fantastic financial tool, but it's not the perfect solution for everybody. Is it right (or wrong) for you?

Author Mike Roberts is the founder of MyHECM.com and a successful reverse mortgage industry veteran. Writing in plain language, Roberts cuts through all the nonsense, rumors, and hype you may have heard about reverse mortgages. There are no sales pitches here!

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How a reverse mortgage really works.
Who should (and shouldn't) get a reverse mortgage.
Common myths and misconceptions.
Insider tips and tricks lenders don't tell you (and you likely won't find out anywhere else).
How to increase your payout & reduce closing costs (this alone is worth the cost of the book).
Pitfalls to avoid.
Why some applicants get approved and some don't.
How to finance a home purchase without a mortgage payment (yes, this is for real!).

Also included are detailed case studies based on real-life scenarios that tie key concepts and terms together. You'll see for yourself how a reverse mortgage can help you live a more enjoyable and financially secure retirement.

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