If you’ve made the decision to stay in your home, but you’re not sure if your savings will last, a reverse mortgage could be a potential solution to help you achieve that goal.
But different reverse mortgage types can 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 in the market today are Home Equity Conversion Mortgages (HECMs or “Heck-um”s), which come in both rate types but borrowers with higher valued homes are looking at the proprietary or “jumbo” loans. Proprietary Loans are not government insured and many jumbo borrowers prefer a lump sum fixed rate, 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 they have 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 as you will see below.
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 or liens on their property. HUD has restrictions on the amount of the loan a borrower can receive at closing or in the first 12 months and if any portion of the fixed rate loan is restricted, the borrower forfeits these funds. It is important 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 even if they must wait to gain access to them.
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 reverse mortgage calculator), in a line of credit that you can access when you want, or a combination of any 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 loan closing. 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”, but 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 and the rest can stay in the line, still available to you but not accruing interest until you borrow them.
There is never a prepayment penalty so those 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 though, unlike the adjustable rate line of credit where you can repay and re-borrow, once paid back on the fixed rate, those funds are never again available.
For example, let’s 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.
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.
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.
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. (Learn more about the reverse mortgage credit line growth rate)
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.
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