If you have decided to stay in your home but are still determining if your savings will last a reverse mortgage may be the solution to help you achieve that goal.  Different reverse mortgage types serve different purposes, and as with any mortgage, you must consider which program and rate options are best suited for you.  Like any other mortgage, reverse mortgages offer two interest rates: fixed and adjustable.

Insured by the Federal Housing Administration (FHA), the most common reverse mortgages on the market today are Home Equity Conversion Mortgages (HECM or “Heck-um” s), which come in both rate types.  However, borrowers with home values above the 2024 HECM limit of $1,149,825 may want to consider proprietary or “jumbo” loans.

Proprietary Loans are not government-insured, and many jumbo borrowers prefer a lump sum fixed rate, which takes all available funds at the beginning of the loan.  Still, the proprietary programs are available to younger borrowers, some down to 55 years of age.  A reverse mortgage allows homeowners at least 62 years old to receive a portion of the equity built up in their homes on the HUD program.

The younger the borrower, the less money you receive under the program, but for some borrowers who are not yet 62 but need the benefits of the proprietary programs to offer, the proprietary programs may even be of use for borrowers with homes valued at or under the HUD maximum of $1,149,825.

Instead of making payments to the lender each month to pay down any debt on your home, as is the case with a traditional or forward loan, the reverse mortgage will allow you to extract money from the equity in your property without having to make a monthly mortgage payment to repay the loan for as long as you live in the property and pay your taxes and insurance in a timely manner (but since there is never a prepayment penalty, you always have the option to repay the loan up to and including payment in full without penalty if you so choose).

HECM Reverse Mortgage Loan Types

Before deciding which rate type to choose for your reverse mortgage, consider the options available.  Fixed-rate reverse mortgages give borrowers a one-time, “lump-sum” payment at the closing of all their loan proceeds.  After the payoff of any mortgages/liens on the property, borrowers must take 100% of all funds available to them under the loan.

HUD limits the amount of money a borrower can receive at closing or in the first 12 months based on the amount currently owed on the property and the costs to get the reverse mortgage.

Due to the limitations, borrowers are capped at 60% of their available loan proceeds in the first 12 months unless the money is needed to pay off existing liens and costs to obtain the loan (plus up to 10% of the loan amount for the borrower’s use if the initial draw exceeds the 60% up to the maximum loan amount).

If you choose the fixed rate option, the amount you receive at closing must be adequate for your needs because there can be no subsequent draws of additional funds later.  If any portion of the fixed-rate loan is restricted, the borrower forfeits these funds.  In contrast, the borrower obtains availability to these funds after 12 months on the adjustable-rate line of credit options.

Adjustable-rate reverse mortgages offer more flexibility for how you wish to access your home equity.  The adjustable rate is available in multiple draws, so any funds not available at closing or in the first 12 months are available to the borrower after 12 months.

Borrowers choosing the adjustable-rate option only forfeit funds available in the first 12 months.  Under the adjustable-rate reverse mortgage, homeowners can choose to receive home equity in monthly payments, term payments, or tenure payments (a term payment being for a set term established by the borrower and a tenure payment being a payment for life, which the reverse mortgage calculator determines).

With a flexible line of credit that you can access when you want, or a combination of these choices (i.e., a small lump sum to make repairs now, a portion in a line of credit to be able to access for later needs, and the remainder in monthly payments for life).

Fixed Vs. Adjustable Reverse Mortgages

Any time borrowers draw all their funds at the initial closing, they begin to accrue interest on the entire balance from that date.  On a fixed-rate reverse mortgage, borrowers accrue interest on the entire loan balance, which is taken at the loan’s closing, and they have no choice; this is the only draw option.

On the adjustable rate, borrowers can take only a portion of their funds initially and then only accrue interest on the funds they need.  If you do not need all your funds immediately and leave a good portion in the line of credit, you do not accrue interest on the funds you do not borrow, so your balance owed stays lower longer.  The interest only accrues on the used portion, so your loan balance stays the same from interest accrual as quickly. 

Reverse mortgages differ from standard or forward mortgages in that you don’t apply for a set “loan amount”; instead, you receive a benefit based on the HUD calculator and specific circumstances related to the program parameters.

The fixed-rate gives you all the available funds upfront, while the line of credit allows you to choose how much money you want to receive at any given time up to your maximum program allocations.  The remaining funds can stay in the line, always available to you but only accruing interest once you borrow them.

There is never a prepayment penalty.  Borrowers set a fixed rate, choose to pay back any unneeded funds, and may do so at any time without penalty.

Another difference between the fixed and adjustable programs is that unlike the adjustable-rate line of credit, where you can repay and reborrow funds, those funds will not be available again if you repay any funds on the fixed-rate program.  Because the program is a single-draw option, the funds cannot be reborrowed if you pay your loan balance down on a fixed-rate reverse mortgage.

Here is an example.  Let us assume your benefit amount based on age and property value is about $400,000.

If you owed that much on your current mortgages, the lender could only give you this total amount on the day the loan closes.  Let’s also assume you only owe $100,000 and want another $50,000 to make improvements for a total draw of $150,000.

The remaining $250,000 that you did not draw on the line of credit costs you nothing to keep, and that line amount grows over time due to the growth feature of the program.  That $250,000 would become significantly higher in 10 years.  Borrowers do not need to wait for older ages to get the loan, so they have higher benefits.  As shown in the examples, their line will grow as they age on any unused portion of their line.

On the adjustable-rate loan, you can take just $150,000 and leave the remaining funds in a line of credit that costs you nothing if you never use them.  If you choose the fixed rate option, you must take 60% of the $400,000 available proceeds or $240,000.

If you did not have an immediate need for the money, you would need to put the remaining $90,000 in an account that would make less interest for you than it would accrue being borrowed funds.  You can choose to repay the loan balance after the loan closes on the fixed rate loan—without penalty, but those funds do not work for you and can never be reborrowed.

Example: Adjustable-Rate Line of Credit

Under this circumstance, you would only have interest added to the $150k balance, and after 10 years at current interest rates, your loan balance will be around $247k 

Example: Fixed-Rate Lump Sum

If you decided to keep the initial amount of $240k and did not make any repayments, the loan balance after 10 years will total around $402k

Fixed Rate FAQs

ARLO recommends these helpful resources: 

• How Reverse Mortgage Adjustable-Rate Margins Work
• Reverse Mortgage vs HELOC – What’s the Smarter Choice?