Trying to decide which is the Best Reverse Mortgage? (Fixed vs. Adjustable)
The best reverse mortgage depends on your goals and needs. For many, simply being able to stay in your home (Age in Place) is the biggest goal of all. For others, making their retirement dollars last longer is the goal. If you are unsure if you have enough money in your savings and retirement accounts or would like to see how a reverse mortgage could potentially make your portfolio last longer, than you have come to the right place.
Let’s cover the basics first. Just like traditional mortgages, reverse mortgages offer two types of interest rates: fixed rates and adjustable rates. So which is right for you? In the past, reverse mortgages were often used as a last resort when all savings and retirement accounts were exhausted. Today, more and more people are starting to get a reverse mortgage early on, just before retiring or soon after to help retirement funds last longer and preserve cash flow by not pulling cash from accounts to make a monthly mortgage payment. Always consult your financial advisor.
Any homeowner over the age of 62 can apply for a reverse mortgage. As the borrower, you must occupy the home as your primary residence. Reverse mortgages are based on your home’s equity. Rather than making payments to the lender each month a reverse mortgage allows you to receive money from the equity in your home.
The most popular reverse mortgage on the market today is the Home Equity Conversion Mortgage (HECM) and the good news is that HECM Reverse Mortgages are insured by the Federal Housing Administration (FHA) and are available as either a fixed or adjustable rate. Let’s take a closer look at each.
HECM Reverse Mortgage Loan Options
Because HECM Reverse Mortgages are insured by FHA you will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can usually finance the mortgage insurance premium (MIP) as part of your loan. There are two basic options available, the standard or the saver.
- The standard MIP is the more expensive of the two. This is calculated at 2% of the home’s appraised value (max claim amount). As an example, if your home is appraised at $175,000, then the upfront MIP cost is $3,500.
- The saver MIP is the less expensive of the two. This is calculated at .01% of the home’s appraised value (max claim amount). Using that same example, if your home is appraised at $175,000, then the upfront MIP cost is $17.50.
The Fixed rate reverse mortgage is pretty basic. It is only available with a lump sum payout. This means that you must take all of the cash you qualify for at closing. The fixed rate is only available under FHA’s HECM Saver program which means extremely low MIP and allows borrowers to use the available cash for any purpose they choose. Fixed rate reverse mortgages usually carry a higher interest rate at origination, but the fixed rate will not adjust as the market changes.
Adjustable rate reverse mortgages allow you to take your cash in several options: line of credit, monthly payments, tenure payments (see below), a lump sum payment or a combination of these. The adjustable rate is available under either the HECM Saver program or the HECM Standard program. Here is a little more detail:
- Tenure: Equal monthly payments for as long as you live in your home (primary residence)
- Term: Equal monthly payments for a fixed number of years.
- Line of Credit: A line of credit accessible at your discretion
- Modified Tenure: Combination of smaller fixed monthly payments
- Modified Term: Combination of smaller fixed monthly payment for a fixed number of years, with a line of credit accessible at your discretion.
- Lump Sum: Receive all of your cash at closing.
Fixed vs. Adjustable Reverse Mortgage
With a fixed rate reverse mortgage the borrower(s) accrue interest on the entire lump sum cash amount taken out at loan closing. With an adjustable rate the borrower(s) accrue interest only on the outstanding balance monthly.
So, with the adjustable rate reverse mortgage, If you don’t need all of your funds upfront, you can leave a good portion of cash in the line of credit. Take some and leave some for later. You would not accrue interest on the funds you do not actually borrow.
One of the best features of the fixed rate reverse mortgage is that the interest rate never changes. That is why they call it fixed. The adjustable rate will change over time but typically starts with a lower interest rate at the time of origination.
The bottom line is that reverse mortgages were designed to help seniors stay in their homes by using the equity in their homes. As you can see there are many different scenarios in which a reverse mortgage can be used as a great financial planning tool to help seniors stay in their homes and make their retirement dollars last longer.
Looking for more info? You’re in luck!
Reverse Mortgage 101: Seven Core Questions for Reverse Mortgage Shoppers
- How Does a Reverse Mortgage Work?
- Who is Eligible for a Reverse Mortgage?
- Which is Best: Fixed or Adjustable Rate Reverse Mortgage?
- How Do I Find the Perfect Reverse Mortgage for My Needs?
- What is the Reverse Mortgage Process?
- How Do I Find a Quality Reverse Mortgage Banker?
- How Will I Receive the Money?
For an explanation of Reverse Mortgage 101 click here
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