Fixed Rate vs. Adjustable Rate
Choosing between a fixed-rate reverse mortgage and an adjustable-rate reverse
mortgage depends 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
fixed-rate, lump-sum 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 fixed-rate, lump sum reverse
mortgage, all eligible proceeds are withdrawn right away, and interest begins
accruing on the entire balance immediately. Thus, 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
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 which 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 10% above your starting rate. Rates for the
fixed rate 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 is to
live a healthy life and to stay in the home for many years while he or she keeps
collecting the money.