Like all mortgages, borrowers have multiple program options when it comes to reverse mortgages. For the federally-insured Home Equity Conversion Mortgage (HECM), there are two types: fixed and adjustable rate loans.
For each product, there are some considerations that come into play when making a choice about which might fit your situation best.
With a fixed rate reverse mortgage, borrowers receive one rate for the entire course of the loan. The product also requires that you receive all of the loan proceeds in a lump sum at the time of closing.
For many, the fixed rate option is a great choice because it provides peace of mind knowing what your interest rate will be for the life of the loan.
Adjustable rate reverse mortgages offer more flexibility and typically provide borrowers with lower interest rates than fixed rate loans.
The rate is based off of either the LIBOR or CMT indexes. The term LIBOR stands for “London Inter-Bank Offered Rate” and is an alternative to the United States Treasury Rate (CMT).
You can opt to receive your loan proceeds either as a lump sum, a line of credit, or as term or tenure payments paid to you on a monthly basis. Borrowers also have the option of doing some combination of the three.
For example, you might take some proceeds upfront to pay off an existing mortgage, and opt to put the remainder of the loan in a line of credit. The unused portion of the line of credit will grow over time, increasing access to borrowing power.
In an adjustable rate reverse mortgage, you will see one rate at the beginning of the loan, but that rate is then subject to change—within certain boundaries.
In regards to annually adjusted HECM loans, the adjustable rate cannot increase over a certain cap amount based on the initial rate of the reverse mortgage. Lenders may not adjust annually adjusted HECMs by more than two percentage points per year and not by more than five total percentage points over the life of the loan, as mandated by the Federal Housing Administration. This cap protects you from the effects of a rapidly changing rate environment, should one occur during the life of your loan.
It’s important to take a look at a few things in deciding which reverse mortgage product is best for you. First, what are you planning to do with the loan proceeds and how immediately do you need them?
I have a substantial mortgage on my current home and I would like to eliminate my mortgage payments in order to reduce monthly expenses.
In this case, the fixed rate product may be the best option, because it allows you to borrow the full loan amount upfront. Your mortgage will be paid off from the reverse mortgage loan proceeds, eliminating your monthly mortgage payments. Any remaining proceeds can be used at your discretion, and the rate at which your interest accrues will remain the same over the entire course of the loan.
I don’t need the proceeds of the loan right now, but it would be nice to have some funds that I can use in the future if I need them, for medical expenses or any other emergencies that might come up.
This is a case where an adjustable rate loan may make better sense. You can reserve the funds as a line of credit and can draw on them whenever you wish.
These are just two scenarios that some borrowers might be facing. However, every situation is different, so it is best to consult a reverse mortgage professional who can help you determine which product is best for your specific needs.