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If you’ve made the decision to stay in your home, but you’re not sure if your savings will allow you to do so, a reverse mortgage could be a potential solution to help you achieve financial stability.
But different reverse mortgage types can serve different purposes and as with any mortgage, you must consider which rate option is best suited for you before taking out the loan. 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.
A reverse mortgage allows homeowners who are at least 62 years old to receive payments from 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.
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 of their loan proceeds, after the payoff of any mortgages or liens on their property.
The fixed rate is available under FHA’s HECM Saver program. It has an extremely small Up-Front Mortgage Insurance Premium and allows borrowers to use all available proceeds for any purpose they choose but being a fixed rate, borrowers receive all their available funds on the day the lender closes the loan.
Adjustable rate reverse mortgages offer a bit more flexibility for how you wish to access your home equity. The adjustable rate is available under the Saver program, as well as the HECM Standard program.
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), 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 are accrue interest on the entire lump sum amount taken at loan closing whereas in an adjustable rate, borrowers accrue interest on the outstanding balance monthly. If you do not have a need for all your funds and leave a good portion in the line of credit, you do not accrue interest on the funds you do not actually borrow.
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 actually borrow them. Those borrowers who are absolutely set on a fixed rate loan and know they will never need more than a certain amount of money can choose to make an early repayment of some of the funds to achieve this goal.
For example, say your benefit amount is about $400,000 so this is what the lender would give to you on the day your loan closes, but you only want to access $200,000. You can make a repayment back to the loan balance after the loan funds—without penalty. You have to remember though, once you repay funds on the fixed rate mortgage, you cannot “re-borrow” them.
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.
Do you enjoy numbers? Download our helpful amortization calculator found here.