Why might a HECM lender want you to take all your
available loan amount in a single lump sum at closing?
Generally, it's not smart to borrow more than you need, or pay interest on funds you aren't using.
Because lenders make more money if you take all the loan funds right away.
Most HECM lenders sell their loans soon after closing them, and the greater the amount owed
on the loans at that time, the more a buyer will
pay for them.
Gen erally it's just a simple percentage of the amount owed. So, for example,
o if you take all the money you can
in a single lump sum at closing, and
o if that amount (including all
upfront costs) is $200,000, and
o if your lender sells your loan
for 6% of that amount, then
o your lender sells your loan for $12,000.
But
o if you don't need all the money now, and
o if you decide to take less (while keeping
the rest available to you in a creditline
for later), and
o if the initial amount you owe is, say,
$100,000, then
o your lender sells your loan for $6,000.
So you can see why a lender might prefer that you take all the money upfront in a single lump sum. If you do, you increase the amount the lender earns when selling your loan. And that extra $6,000 requires no additional work for the lender.
But how does the deal look from your side?
It could be a very bad deal if you are receiving Medicaid benefits or may become eligible for them during the time you have the loan.
Generally, it's not smart to borrow more than you need, or pay interest on funds you aren't using. For more information, go to: How can you compare HECM loan costs?