Reverse Mortgages with Fixed Rates

Since the development of the reverse mortgage program by HUD, only adjustable interest rates have been offered.  With the recent news stories spreading fear about the “danger” of adjustable rate mortgages, it is understandable that many seniors have been more than a little hesitant of the reverse mortgage with an adjustable rate.

As of about 6 months ago, adjustable rate reverse mortgages for seniorsare no longer the only option.  A new fixed-rate reverse mortgage has been introduced, which was good news to many.  With rates as low as 5.5% this year, a fixed rate reverse mortgage has never sounded better!  The rate gets locked during the final stage of the loan documents and remains fixed for the duration of the loan. But, as with many good things, there are a few caveats to be aware of.

Unlike the adjustable interest rate reverse mortgage, no credit line, term or tenure income payment is available.  The senior homeowner must take the money that they qualify for through the fixed rate reverse mortgage as a lump sum.  This is no problem for those that need a large sum of money immediately, for example, to pay off a current mortgage.  But for seniors who just want a little additional monthly spending money and owe little or nothing on their homes, the lump sum requirement associated with fixed interest reverse mortgages may not be best choice.

If the money is taken out all at once, then interest will begin accruing on the full loan amount right away. But if only a smaller monthly income is needed, the senior homeowner is better off with the adjustable rate reverse mortgage, so they are only paying interest on the money they need as they cash it.  This type of loan leaves the senior or their heir more equity in the home down the road because the balance of the reverse mortgage builds gradually, allowing less interest to accrue in the long run.

The adjustable rate reverse mortgage also has the advantage of offering a larger amount of money to the senior homeowner. For example, a senior whose home is worth $220,000 and who is in his early 70’s, qualified for $10,000 more under the adjustable rate versus the fixed rate reverse mortgage.

As exposed in the news stories, the main danger of the typical adjustable rate mortgage is that your monthly mortgage payment could rise quickly and beyond your means.  However, since a reverse mortgage has no monthly payment, this danger does not apply.  Interest rates could rise and fall, but other than seeing fluctuations on their monthly statement, the senior will not be impacted.  For these reasons, many seniors do not care about having an adjustable interest rate.

While the adjustable rate reverse mortgage has some distinct advantages, the fixed rate reverse mortgage may be a good idea for the right seniors. Those who think that an adjustable rate will average out over time to be higher than the currently available fixed rate are wise to consider a fixed loan. The fixed loan can be especially advantageous to those who have a good use for the lump sum of cash they will receive, because paying the interest on the whole loan from day one is already part of their expectation.