03/02/2009

Many senior borrowers who start looking into reverse mortgages are not aware of it, but there is a fixed rate reverse 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. Most Reverse Mortgage borrowers have chosen the adjustable rate option for the simple fact that the fixed rates have historically been quite a bit higher than the adjustable rates, the borrowers qualified for less money with fixed rates and since the borrowers have to take a full draw on the fixed rate loans, it just did not make sense for many senior borrowers.  It is finally time for senior borrowers to look at the fixed rates as a viable option.

The Fixed Rate Reverse Mortgage for the week of March, 2009 is down to 5.56% (this is the Initial Interest Rate and the Effective Rate on the fixed program since there are no indices or margins to consider).  This means that when you compare this to an adjustable HECM on the Constant Maturity Treasury with a 2.50% margin, the fixed rate, will never increase and the rate is at 5.56% versus the adjustable option which can increase. With the adjustable rate, the borrower’s eligibility is based not on the Initial Rate of 3.14% but rather on Expected Rate which is based on the 10 year CMT plus the margin and that rate today is 5.50%. 

In other words, the amount the borrower will receive under the two options is extremely similar with today’s fixed rates instead of the large disparity that fixed rate borrowers have always seen in the past. What does this mean for senior borrowers?  It means that they have a better opportunity now to obtain a low Fixed Rate Reverse Mortgage than at any time.  Also, 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 rates do rise.  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. 

Historically, adjustable rates have not been a bad choice either, but for the next few years in this very volatile economy, no one knows where rates are headed. 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, especially now.  If you wanted to get a line of credit or monthly payments, they you still need to look into the adjustable rate options.

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.  A fixed rate is something that many borrowers like the sound of but shied away from as soon as they saw that they received a lot less money under this option.  If this is the case for you and a one-time distribution works for your circumstances, now is the time to reconsider the fixed rate option.

The rate is not locked until the lender is ready to draw the loan documents so it is not like a forward mortgage, you cannot lock in a rate for 30 days up front.  Nonetheless, if a fixed rate reverse mortgage sounds good to you, then there is no time like the present to take a hard look at this opportunity with the rates being down.

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Reverse Mortgage Rates

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