The number of people opting to take out a fixed rate reverse mortgage has gone up dramatically over the last few years, but it’s important not to overlook all the benefits of having an adjustable rate reverse mortgage.
While the certainty of the fixed rate can be a positive, taking out an adjustable rate reverse mortgage comes with features you won’t find on any fixed rate product.
Adjustable Rate Provides Multiple Product Options and Flexibility
Under the Federal Housing Administration’s Home Equity Conversion (HECM) program, borrowers have the choice between taking a reverse mortgage with an adjustable rate or a fixed rate.
Today, the fixed rate option is only available under the HECM Saver program; a program that offers a very low upfront cost, but in turn, allows borrowers to access a lower percentage of their home equity than would be available under the FHA’s “standard” loan programs.
The adjustable rate is available in the form of both a HECM Saver and a Standard. Under these programs the rate adjusts monthly and is based on the London Interbank Offered Rate (LIBOR).
Adjustable Rate Payment options
Borrowers who take out a fixed rate reverse mortgage are required to receive a lump sum payment at the time of closing; they have no other options.
A borrower who commits to a fixed rate reverse mortgage must take all of the proceeds at once. This can be useful for borrowers who are looking to use their reverse mortgage funds for a one-time expense, such as paying off an existing mortgage.
With an adjustable rate HECM, borrowers have much more flexibility about the way they can tap into their home equity. These options include the ability to withdraw the funds in a lump sum, term or tenure payments, or as a line of credit.
A borrower may also choose to combine these options or change the payment type during the course of the loan, for a small fee. The adjustable rate may offer more flexibility to a borrower who is looking to boost monthly income or save the reverse mortgage proceeds for an unforeseen cost down the road.
Credit line growth feature
Under the credit line reverse mortgage option, there is a growth feature that allows borrowers to access more proceeds the longer they leave their credit line unused.
The unused portion of the credit line grows at the same rate at which the loan accrues interest + 1.250% monthly. If the fully indexed rate (index + margin) is 2.5% + 1.25%, the credit line would grow about 3.75% per year. The benefit of this growth feature can be substantial.
For example, say you’re 65 and have a home paid off and valued at $500,000. You will qualify for a line of credit for about $305,000. Using today’s expected rate assumption for growth at 2.95% that credit line will have grown to $558,000 after 10 years—an additional benefit of more than $250,000.
Learn more about the credit line growth feature
It can be extremely beneficial to borrowers who do not need their funds right away and some have even used it as a retirement planning tool as an alternative to selling off other investments that have lost value over time.
Financial planners are beginning to recommend adjustable rate reverse mortgages for this exact reason; often other financial tools cannot match the benefits of an adjustable rate reverse mortgage taken as a credit line.
A recent study by Texas Tech financial planners and researchers John Salter and Harold Evensky finds the of the use of the HECM Saver credit line “improves portfolio survival rates by a significant amount.”
If you would like to learn more about reverse mortgages and the differences between fixed and adjustable rate loans—call us Toll Free 800-565-1722 or get an instant quote on both Fixed & Adjustable products with our free online calculator.
- Current Reverse Mortgage Interest Rates at reverse.mortgage
- Variable Rate Reverse Mortgages Explained
- WSJ: Current & Past Libor Index
By Cliff Auerswald – Add me to your circles