Adjustable versus Fixed Rate Reverse Mortgage

Choosing between a fixed rate reverse mortgage and an adjustable rate reverse mortgage happy couple sitting side by side outdoors laughingdepends greatly on the homeowner’s reasons for seeking one. The interest rate type can affect how the proceeds will be disbursed. If the senior wishes to pay off their existing mortgage, he or she is more likely to want a lump sum, fixed rate reverse mortgage – as opposed to an adjustable rate reverse mortgage, which provides a guaranteed monthly check or line of credit for as long as the person lives in the home. In a lump sum, fixed rate reverse mortgage, all eligible proceeds are withdrawn right away, and interest begins accruing on the entire balance immediately.

Borrowers who do not need a large lump sum all at once should consider a reverse mortgage with an adjustable rate with a growing line of credit feature. Whether fixed or variable, the home value, interest rate and age of the youngest borrower will determine how much money may be drawn.

How much money can a typical borrower get?

The amount borrowed on a reverse mortgage depends on the appraised value of the home, the youngest age on title, and current interest rates.  These factors are entered into an FHA calculation that determines the amount of money available from the reverse mortgage.  The calculation uses actuarial tables, which provide for an older person to receive more funds than a younger person.

How are rates calculated?

Rates for the adjustable rate reverse mortgage are calculated according to the London Interbank Offered Rate or LIBOR, plus a margin charged by the lender. The adjustable rate has a cap of 5% or 10% above your starting rate. Rates for the fixed rate reverse mortgage program are set by the lender and this rate will be in place for the life of your loan.

How is interest charged?

Interest is charged on any funds that you borrow and any fees you finance. The accrual of interest is therefore based on your outstanding loan balance. A lump sum at the start of the loan means that all of those funds accrue interest over the life of the loan. With a credit line or regular payments, interest accrues for each withdrawal starting with the first withdrawal. Your credit line is not charged interest until you withdraw from it at which time it the amount you borrow transfers to your outstanding loan balance and begins accruing interest.

Under the FHA HECM program, the Federal Reserve Board requires that the lender disclose to the prospective borrower a Total Annual Loan Cost, or “TALC” disclosure. It displays the total transaction costs over the projected life of the loan. The borrower and the borrower’s family should be made fully aware of the costs incurred in obtaining a reverse mortgage.

The best way for a borrower to ‘beat the lender’ on a reverse mortgage (fixed rate or adjustable) is to live a healthy life and to stay in the home for many years while he or she keeps collecting the money.

David Chee can evaluate your situation and provide advice on adjustable versus fixed rate reverse mortgages.

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