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 2021 HECM limit of $822,375 are looking at 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.
Instead of making payments to the lender each month toward the ownership of your home as you would with a conventional mortgage, this type of loan allows you to receive money derived from your home’s equity.
There are different ways to receive your reverse mortgage funds. They are as follows:
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.
This is after the payoff of any mortgages/liens on the property.
HUD has restrictions on the amount of the loan a borrower can receive at closing or in the first 12 months.
If any portion of the fixed rate loan is restricted, the borrower forfeits these funds.
It is important to note that if you choose the fixed rate option, the amount you receive at closing is adequate for your needs.
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, 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 HECM 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
On a fixed rate reverse mortgage, borrowers accrue interest on the entire loan balance which is taken at the closing of the loan.
On the adjustable rate, borrowers can choose to take only a portion of their funds and then only accrue interest on the funds that they needed initially.
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.
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.
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.
A word of caution, however. Unlike the adjustable-rate line of credit where you can repay and re-borrow, with the fixed-rate option, once paid back, those funds will not be available again
Here is an example. Let us assume your benefit amount is about $400,000.
This is what the lender would give to you on the day your loan closes. But you only want to access $200,000.
On the adjustable-rate loan, you can take just $200,000 and leave the remaining funds in a line of credit that costs you nothing if you never use them.
Or you can choose to make a repayment back to the loan balance after the loan closes on the fixed rate loan—without penalty.
Example: Making Repayment After Loan Closing
Under this circumstance, you would only have interest added to the $200,000 balance, and after 10 years at current interest rates, your loan balance will be around $338,892.
Example: Lump Sum Payout & Making No Repayments
If you decided to keep the initial amount of $400,000 and did not make any repayments, the loan balance after 10 years will total around $687,938.
Example: Adjustable Rate with Rising Rates
A third option would be to take the adjustable-rate reverse mortgage, which will allow you to take a cash advance of $200,00 at closing, while still having access to the remaining funds should you need them in the future.
The benefits of the monthly adjustable rate allow you to do two things, choose upfront how much you want to borrow and the remaining credit line that will grow over time.
Using the adjustable rate, you can also have access to the remaining credit line with some growth over the years.
Compare Fixed VS Adjustable Rate Features
|HECM Fixed||HECM Adjustable|
|Line of Credit||N/A||✔|
|Best for||Single lump sum disbursement||Flexible payment plans
Line of credit
Growth rate feature
|Rates||Fixed Rates from 3.06% (4.06% APR)||Annual Rates from 2.24%|
Fixed Rate FAQs
What is the current fixed rate for a reverse mortgage?
Just as standard loans can change daily, Reverse Mortgage rates are also subject to market fluctuations. To check current pricing on any given day you should check our daily rate sheet.
What payment types are available on a fixed rate reverse mortgage?
A fixed rate reverse mortgage is available as a one-time, lump sum withdrawal only.
Why is a line of credit not available on a fixed interest rate?
Interest rates are available at any given time based on market conditions. Lenders cannot guarantee a fixed rate is still available years from the date of loan issuance and could render the loan unavailable to borrowers who would otherwise depend on these funds later.
Are all fixed rate reverse mortgages the same?
All fixed rate reverse mortgages are not the same. Private or Proprietary reverse mortgages do not have the same loan amounts or rules as the HUD HECM loan so borrowers should review both options when considering a fixed rate loan.
How often do reverse mortgage interest rates change?
Fixed rate reverse mortgages are more stable than forward loans, but they still CAN change at any time.
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