If you have made the decision to stay in your home, but you are not sure 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 option are best suited for you. Just like any other mortgage, reverse mortgages offer two types of interest rates: fixed rates and adjustable rates.
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 2023 HECM limit of $1,089,300 may want to consider the proprietary or “jumbo” loans.
Proprietary Loans are not government insured and many jumbo borrowers prefer a lump sum fixed rate, which is taking all available funds at the beginning of the loan. A reverse mortgage allows homeowners who are at least 62 years old to receive a portion of the equity built up in their homes on the HUD program but the proprietary programs are available to younger borrowers, some down to 55 years of age.
The younger the borrower the less money you receive under the program but for some borrowers who are not yet 62 but really need the benefits of the proprietary programs offer, the proprietary programs may even be of use for borrowers with homes valued at or under the HUD maximum of $1,089,300
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 to you. Fixed-rate reverse mortgages give borrowers a one-time, “lump-sum” payment at 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 any portion of the fixed rate loan is restricted, the borrower forfeits these funds whereas the borrower obtains availability to these funds after 12 months’ time on the adjustable-rate line of credit options. It is important to note that 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.
Adjustable-rate reverse mortgages offer a bit 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’ time.
Borrowers choosing the adjustable-rate option do not forfeit any funds not 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 is determined by the reverse mortgage calculator).
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 closing of the loan and they have no choice, this is the only draw option.
On the adjustable rate, borrowers can choose to take only a portion of their funds at the start and then only accrue interest on the funds that they needed at that time.
If you do not have a need for 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 actually borrow so your balance owed stays lower longer. The interest is only accruing on the used portion so your loan balance is not increasing from interest accrual as quickly either.
Reverse mortgages are different 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 your specific circumstances as they relate to the program parameters.
The fixed rate gives you all the funds you have available 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 rest of the funds can stay in the line, always available to you but not accruing interest until you borrow them.
There is never a prepayment penalty. Borrowers who are set on a fixed rate and choose to pay back any unneeded funds may do so at any time without penalty.
Another area of difference between the fixed and adjustable programs is that unlike the adjustable-rate line of credit where you can repay and re-borrow funds, if you repay any funds on the fixed rate program, those funds will not be available again. Because the program is a single draw option, if you pay your loan balance down on a fixed rate reverse mortgage, the funds cannot be reborrowed.
Here is an example. Let us assume your benefit amount based on your age and property value is about $400,000.
The lender could only give you this full amount on the day the loan closes if you owed that much on your current mortgages so let’s also assume you only owe $100,000 and you want another $50,000 to make some 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, their line will grow as they age on any unused portion of their line and this will be shown in the examples.
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 would need to take the entire 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 not make as much interest for you as it would accrue being borrowed funds. You can choose to make a repayment back to the loan balance after the loan closes on the fixed rate loan—without penalty, but then 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
Compare Fixed VS Adjustable Rate Features
|HECM Fixed||HECM Adjustable|
|2023 Lending Limit||$1,089,300||$1,089,300|
|Line of Credit||N/A||✔|
|Best for||Single lump sum disbursement||Flexible payment plans
Line of credit
Growth rate feature
|Rates||Fixed Rates from 4.68% (5.68% APR)||Annual Rates from 3.50%|
Fixed Rate FAQs
What is the current fixed rate for a reverse mortgage?
What payment types are available on a fixed rate reverse mortgage?
Why is a line of credit not available on a fixed interest rate?
Are all fixed rate reverse mortgages the same?
How often do reverse mortgage interest rates change?
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