We
have put several articles out regarding the differences between
different options that borrowers have when receiving their cash under
the HUD Home Equity Conversion Mortgage (HECM or “Heck-um”) reverse mortgage program. There are benefits and drawbacks to both the fixed rate reverse mortgage and the adjustable rate programs. For example, the adjustable rate programs offer much more flexibility.
You
can take all your funds as a lump sum at closing, a payment for life or
a set term, leave it in a line of credit for use when you desire or a
combination of any of the above. With the fixed rate, the choice
is only a one time disbursement at settlement and then due to
lender’s programs, their calculators, etc, the borrowers’
only option is a full draw of the funds available to them.
Now
this may seem strange to some. In fact, we had one caller call
our office and accused two of us of being liars due to the fact that
she was an educated woman and she refused to believe that any program
would exist that would require a borrower to take the full draw amount,
especially if they did not want to!
We
explained to her that it was the way the program was written, that the
lender had no software for a partial draw and that if she wanted to
pre-pay any portion of the loan, she could do so without penalty at any
time. She refused to believe this could be possible, choosing to
believe that we were deliberately misleading her. Her basic
premise was that HUD
would never require her to take more money than she wanted, and she is
correct! HUD does not require her to take more money than she
wants to…but that is why there are other options
available.
This lender’s fixed rate reverse mortgage
program simply was not the right product to fit her needs and
desires. There may be a fixed rate program in the future that
allows for borrowers to take only a portion of the funds or a method
may be found to make a fixed rate reverse mortgage instrument an
open-ended contract (allowing for lines of credit or more than one
draw), but it does not exist today.
There is not as much flexibility in how you get your funds, but there are a couple of very good things that fixed rate reverse mortgages
can do. For example, right now with all the increases to the
margins that the adjustable rate loans have seen as of late, the fixed
rate that we have offers borrowers more cash in their pocket than any
of the adjustable options.
For
borrowers who plan to take the full draw in the beginning anyway, such
as those paying off an existing mortgage or those planning to use the
money immediately for other purposes, the fixed rate will often give
the borrowers thousands of dollars more than the adjustable rate
option. Also, depending on what you think rates will do in the
future, fixed rates will never change.
The great thing about a fixed rate (aside from more cash in your pocket) is that even if the indices, the LIBOR or Treasury
that determine at what rate an adjustable loan accrues interest, start
going up, the fixed rate loan will never increase. If rates do
begin to rise due to inflationary pressures, the fixed rate borrower
has the added ease of mind that their fixed rate will not increase with the inflation.
If
you are considering a reverse mortgage and you need all your funds from
the beginning, a fixed rate may be a fantastic option for you to
consider. If you want a line of credit, a payment for life or are
only looking for a small portion of the funds available to you, then
you need to consider the adjustable rate options. As a side note,
I can only assume that the borrower who called us continued her search
for the fixed rate with a partial draw or more options and was just as
unlucky elsewhere at finding them when we never received a second
call.
If you feel like you really want
the fixed rate option but you do not want all the funds, you can always
take the full draw and then pay back whatever portion of the proceeds
you do not wish to keep. You only pay interest on the outstanding
portion of the funds, there is never a prepayment penalty and then you
can have the fixed rate on the portion you desire. Just keep in
mind that once you pay it back on the fixed rate, you cannot take the
money back out again as you can with an adjustable rate program due to
the closed end instrument. But it is an option for those who want
it.
Use our new comprehensive reverse mortgage calculator to compute credit line growth rates or call us Toll Free at (888) 801-2762 for a personal quote and analysis.
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