Fixed Rate Vs Adjustable Rate Reverse Mortgages
Michael Branson (CEO ARMC) 3/6/08 10:04pm
Being the age I am and having more than 32 years experience in the mortgage banking industry, I always choose fixed rate mortgages for my own financing needs. When the first fixed rate reverse mortgages came out, we received a lot of phone calls from borrowers who were very interested in also getting fixed rate financing. We recently wanted to see if the historical averages of the adjustable rates supported this fixed rate preference.
After all, the adjustable rate reverse mortgages offer more options to borrowers as far as how they can receive their funds, they are starting at a lower interest rate right now and they give the borrower more cash in almost every instance. We were curious to see if the fixed rates would really have been a better deal throughout the years for borrowers based on this historical information compared to a fixed rate at today's low interest rates.
What we found was extremely interesting and really opened my eyes. So much so that if I was looking at a reverse mortgage today and had to make a choice at a fixed rate or an adjustable rate, I would choose the adjustable! Let me tell you why. If you look at the historical information for the last 10 years, the borrower with an adjustable rate mortgage got a better rate as an average.
Then we went back and borrowers with the adjustable loans at today's rates would beat the historic averages against today's fixed rates for a 15 year average as well. In fact, we have to go all the way back beyond the 17 year average of the index used for the Home Equity Conversion Mortgage (which is the 1 year Constant Maturity Treasury) before the average would take the borrower's rate higher than the current fixed rates.
There were no fixed rate HECM Mortgage's available until recently. But if a fixed rate was available and a borrower timed it right, he/she may have been able to catch a lower rate, but if we look at the fixed rates available during the same periods, they are always higher than the adjustable rates and the chances are good that the borrowers would have gotten much worse fixed rates during a good portion of this time.
The only benefit would be if a borrower caught an extremely low rate and then the rates rose from there, but as we've now seen, we have to go back more than 17 years to get an average that is just over today's very low rates. And the 20 year average is less than 6.40% and that includes some years when fixed rates topped 10%!
Now we come to the equity savings of the adjustable rates. The fixed rate reverse mortgage requires that you make a full draw at closing. This means that you begin accruing interest on the full amount of the loan from the very first day. Because of the other options the adjustable rate mortgages allow which include the line of credit, the monthly payments and a combination of monthly payments and line of credit, where the borrower receives the funds as they need them, interest is not accrued until you actually receive the money. This way, you are only taking money as you need it so you are not eating into your equity as fast as you would if you took all the money out in the beginning.
So if you consider a 17 year average that beats today's rates through all kinds of markets (not just in today's low rate environment), qualifies most borrowers for more money and a program that keeps your equity in your property longer, it turns out that the Adjustable Rate Reverse Mortgages are still a great deal!