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fixed rate locked money/funds

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 to 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 as well as 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 rate or an adjustable rate—both options are available to borrowers.

Fixed rate 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 of 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.

Take the following scenarios for example.

Say a borrower has a $400,000 home.

Scenario 1: the borrower owns the home free and clear.

  • Option 1: He 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. For a personal analysis based on your actual age and current market rates, please request your written quote

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.

There is no line of credit 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: The borrower has a mortgage of $225,000.


  • Option 1: He 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: He takes out a fixed rate reverse mortgage with an initial interest rate of 4.5%.

The amount available at closing: $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.

The experts at All Reverse Mortgage® are here to answer your questions! If you have an inquiry about the fixed rate reverse mortgage or unusable funds give us a call Toll Free (800) 565-1722 or request a quote