Fixed Rate Reverse Mortgages
Michael Branson (CEO All Reverse Mortgage Company) 1/30/08 4:07pm
Many senior borrowers who start looking into reverse mortgages are not aware of it, but there is a fixed rate Home Equity Conversion Mortgage (HECM) available. The HECM or "Heck-um" as you may hear it called, is the government insured reverse mortgage program offered by lenders and insured by the Federal Housing Administration. Many senior borrowers prefer the security of the government insured reverse mortgages but up until very recently, the only reverse mortgages available were adjustable rate mortgages.
The adjustable rate mortgages are tied to different indices. It used to be that senior borrowers basically had the choice between a monthly or annual adjustable rate mortgage. Borrowers still have the choice of those adjustable rate mortgages (and now with different indices as well with the recent introduction of the London Interbank Offered Rate or LIBOR rates), but now borrowers can also opt for fixed rate mortgages as well! However, due to the closed end financing regulations associated with fixed rates, there are some limitations on fixed rate reverse mortgages that are not present on adjustable loans. Therefore fixed rate HECM loans can't offer all the features that their adjustable counterparts can. That does not make them worse, you just need to know the differences and choose the one that is right for you.
The starting rates on the adjustable rates are a little bit lower and since that is one of the variables which determine how much money you will receive, you will typically get a little less money up front with a fixed rate. However, since the rate is fixed, it will never go up even if the interest rates rise in the future. This means your equity will not erode as fast. If the rates go down in the future, the fixed rate will not change with those changes either, but the adjustables have a ceiling, or cap on the rate of 10% above the initial rate so the interest that accrues on the adjustable rate reverse mortgages could go up dramatically if the rates rise in the future.
The other consideration with a fixed rate reverse mortgage loan is payment options. On the adjustable reverse's, you can get a lump sum payment (that is all your money up front); a line of credit to use when you want that grows on the portion that you don't use; a monthly payment for a set period of time or for life; or a combination of any of these terms (in other words, you could take cash payment now AND keep some back for a line of credit for when you need it AND get a monthly payment). However, the only option available on the fixed rate is the one time distribution at the initial funding. If you are paying off an existing mortgage and need it all up front, this would not be a problem and the fixed rate is an excellent option. However, if you didn't need all the money and did not want to take all the money in the very beginning, then the fixed rate may not be for you.
So as is the case with reverse mortgages in general, education and knowing what your needs are and what will fill those needs is the key to deciding what's best for you. If you're like me, I always like the sound of a fixed rate better...but if the fixed rate option doesn't give you enough money to meet your needs and the adjustable rate mortgage does, then the adjustable rate might be better for you. Also, if you don't want all the money up front, then you need to consider the adjustable rate mortgage. But remember, if you do want to take all your funds up front, the numbers work for you, and you like the security of a fixed rate mortgage, then the new fixed rate HECM reverse mortgage might be perfect for you!Michael G. Branson (CEO All Reverse Mortgage Company)is a Mortgage Broker who has over 31 years of mortgage banking experience. Toll Free (888) 801-2762