Reverse Mortgage Fixed Rate & Unusable Funds Explained

August 23, 2021

If you have decided that you’d like to use a reverse mortgage to tap into your home equity while remaining in your home, there are several considerations that will help you determine how to make the most out of your loan. A reverse mortgage can be an excellent way for some households to boost their cash flow in retirement, establish a “rainy day” fund for health care expenses or other unexpected costs, or provide a lump sum for a pressing expense such as home renovations or maintenance.

If you are 62 or older and have enough home equity to qualify, a Home Equity Conversion Mortgage (HECM), the most common reverse mortgage type and insured by the Federal Housing Administration, may be the solution for your retirement needs. The decisions you make regarding how and when you will access your proceeds and the type of interest rate you choose could make a real difference in how much you can borrow.

One of those decisions is whether you opt for a fixed or adjustable rate – both options are available to borrowers.

Fixed-rate lump sum restrictions

Several years ago, the Department of Housing and Urban Development, the government agency that oversees the HECM program, placed some new rules on fixed rate reverse mortgages. The new rules were intended to prevent borrowers from drawing all their accessible home equity and spending it at once. The rules essentially restrict fixed-rate borrowers by allowing them access to less funds in total than if they were to take out an adjustable-rate loan.

Taking a fixed-rate reverse mortgage can leave some money on the table that borrowers otherwise would be able to access under an adjustable rate. But how much home equity you have versus how large a mortgage you have can make a major difference in the amount you ultimately will be able to borrow.

If you own your home free and clear, you may be leaving a lot of your home equity untapped when you could access it via an adjustable-rate reverse mortgage.

Also See: Reverse Mortgage Types: Lump Sum Payout -VS- Line of Credit

Scenario 1: Borrower owns a home outright (free & clear)

Option 1: The borrower takes out an adjustable rate reverse mortgage with an initial interest rate of 3.213%.

*ILLUSTRATION FOR BORROWER AGE 75 as of the date of this article. This example is run to illustrate the difference between fixed and adjustable rate programs and payment options, not interest rate availability. Rates are subject to change and the amount you receive under the program is also affected by current interest rates.

The amount available at closing is $145,079

The line of credit available after the first year is $99,520.

Option 2: He takes out a fixed-rate reverse mortgage with an initial interest rate of 4.5%.

The amount provided at closing is $145,079.

No line of credit is available after the first year since all proceeds are taken upfront. Therefore, there is $99,520 in unused principal limit. The borrower is much better off taking the adjustable rate option when the home is owned free and clear.

Scenario 2: Borrower has a mortgage of $225,000.

Option 1: The borrower takes out an adjustable-rate reverse mortgage with an initial interest rate of 3.213%.

The amount available at closing is $21,599.

There are no additional funds available.

Option 2: The borrower takes out a fixed-rate reverse mortgage with an initial interest rate of 4.5%.

The amount available at closing is $21,599.

The borrower can access the exact same funds regardless of whether he chooses a fixed-rate or an adjustable-rate loan when he has a mortgage balance of $225,000.

The bottom line

Homes that are owned free and clear can leave a lot of equity on the table or unable to be borrowed when choosing a fixed-rate reverse mortgage. But for borrowers who have a large mortgage balance, the proceeds can be much closer under the two options—they can even be the same.

ARLO recommends these helpful resources:

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Have a Question About Reverse Mortgages?

Look no further. Michael G. Branson, our CEO, brings a wealth of knowledge directly to you. With a robust 45-year tenure in mortgage banking and 19 years dedicated solely to reverse mortgages, he's the expert you want on your side.

Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

6 Comments on this Article

T. Borden
July 15th, 2023

Hi there Arlo,
I read the article and compared the examples. However, I still don't understand why "unusable funds" are necessary on a reverse mortgage loan that is not free and clear with ample equity for a senior who is not 75. Could you break it down, please?
Reply to T.
- Michael Branson
  July 20th, 2023
  
  Good Afternoon,
  HUD determines the benefits every borrower will receive based on the age of the youngest borrower on the loan, the interest rates in effect at the time, and the value of the home or the HUD lending limit, whichever is less. Then the funds are made available to the borrower(s) following HUD's schedules to deliver funds. If you need all the funds to pay off your current loan or to purchase a new property, all the funds are available immediately. If not, then HUD limits the money you can receive at closing or in the first 12 months. On the line of credit, any funds you cannot take because of this limitation you have access to after the 12 months (literally, on day 366, you can access the remaining funds).
  However, the fixed-rate loan is known as a one-time draw program. In other words, you are limited to only one draw on the fixed rate program, which is the one you take at the close of the loan. There can be no further or future draws on the fixed rate program, so borrowers must take 100% of all money available to them with the fixed rate program at the time the loan closes (unlike the adjustable rate program with which borrowers can take multiple draws of any amount at any time up to the limitations of the program). So, let's look at how these two programs might compare and when the fixed-rate might result in unusable funds.
  Firstly, let's assume that the borrower in each case has a Principal Limit of $100,000.00 and no mortgage to pay off. HUD says that only 60% of the funds may be taken at closing or in the first year when the loan is not used to pay off an existing loan or buy a new home. With the adjustable rate loan, the borrower can take $60,000 at closing or any amount up to $60,000, and then, after the full year, they can request any amount up to their full remaining balance available or leave it in the line of credit to be accessed later. With the fixed rate, though, the borrower must take the full draw of $60,000 at closing (there is no option to take less). Then they lose access to the other $40,000 as they cannot take additional draws with the fixed rate program. That borrower never owes the additional $40,000 because they never borrowed that part of the money, but they lost their ability to draw those funds later as those funds are now unusable. In this case, the fixed-rate borrower lost access to 40% of the funds, which is unusable to them.
  Another time that fixed-rate borrowers can lose access to funds is when they must set funds aside for repairs, etc. Remember that the fixed-rate loan is a single-draw program. You can only get one draw of funds from the lender. If you must do a repair set aside to make repairs to the property, the lender will set aside 150% of the cost of the repairs. Borrowers need to realize that although the term is to set these funds aside to ensure that the repairs are completed, the funds are actually never borrowed. The lender doesn't put money anywhere on behalf of the borrower. The borrower will not receive any additional funds back later as a separate check either. The borrower owes less on their loan. Again, there can be no further draws with a fixed-rate loan, so these funds were unused and not considered borrowed. They are another way funds would be calculated as part of the reverse mortgage loan but could be unusable for the borrower.
  The good thing for borrowers is that they can avoid unusable funds by choosing the line of credit option over the fixed rate option. And secondly, if they do choose the fixed rate option knowing, they will have funds that will be unavailable to them. As a result, the borrower will only accrue interest on funds they receive and do not need to repay the funds that are unavailable to them. Essentially, the balance owed is adjusted for only those funds available to the borrower. Suppose the borrower knowingly chooses the option that makes some money unavailable to them. In that case, it does not "cost" them any money. It just gives them access to less money with their loan.
  Reply to Michael
Russ Case
August 5th, 2019

63 yrs old. Still working full-time until 65 yrs of age. Wouldn't it be best if I obtained a reverse mortgage while still working? I'm thinking 64. Value 224k loan is 79k
Reply to Russ
- Michael Branson
  August 8th, 2019
  
  Hi Russ,
  What's right is what works best for you. No one can say what future HUD guidelines or rates will be so that is impossible to quantify. However, I can tell you that HUD does do a financial assessment and it is probably easier to qualify while you still have employment income. You may still qualify handily with your retirement/social security income though so you may want to visit our calculator to see if the numbers work for you.
  Reply to Michael
Zia Khan
December 12th, 2016

Everyone who advertises the reverse mortgage says they have a calculator but they all want one's personal (everything) information; the so-called calculator doesn't work without submission of personal data. The NRMLA site does actually have a calculator without any gimmicks but it does not explain the 'fixed-rate unusable funds' Your site is the only one which has examples and also explains the fixed rate unusable funds. Very helpful and user friendly. Thank you.
Reply to Zia
- Michael Branson
  December 12th, 2016
  
  Thank you Zia. We don't believe you should have to give us all your information and a DNA sample just to find out if a reverse mortgage will suit your needs! ;>)
  This loan should be all about you and your needs and while it is an FHA-insured loan and therefore we have to follow certain rules, we never forget this fact.
  Reply to Michael