Once you have decided to look into a reverse mortgage, one of the most important decisions you will make is whether to get a fixed rate or adjustable rate reverse mortgage. Experience will usually incline you towards a fixed rate; especially because rates are historically low. There are key differences between both options when it comes to a reverse mortgage that you would be wise to consider and apply to your personal scenario before making a choice.
Current fixed rates typically range from 4.75% to 5.06% depending on the fees you would like to pay. Fixed rate RM’s typically have $0 loan origination fees (unless you are buying down the rate). When you choose a fixed rate on this program you will be required to take all of the money you qualify for at close; every last penny. So, even though you will get a low fixed rate, your accrued interest will compound faster when you start with a high loan amount. Your total cash payout is typically lower with a fixed rate. For example, I have a client that is 89 years old, $0 mortgage balance, and has a home that appraised for $430,000. On a fixed rate she would get roughly $186,000. If she were to choose an adjustable rate, she would have access to a minimum of $307,000 on her reverse mortgage; a difference of $121,000!
Current Annual adjustable rates on reverse mortgages hover under 4.5% and can change once a year; with a maximum yearly increase of 2%. They also come with a lifetime rate cap of 5% over the starting rate. These loans can have an origination fee of up to $6,000. As mentioned previously, the adjustable rate loans do not require you to take any of the money up front and offer a wide variety of methods for withdrawal. You can take a lump sum option, you can take a guaranteed monthly check for the rest of your life (tenure payment), you can take a guaranteed monthly check for a certain period of time (term payment), you can leave your money in a RM Line of Credit (that only charges interest on funds you have actually taken out), or you can do a combination of these options. The Line of credit (LOC) option is especially attractive as it gives you a growth rate for any money left in the LOC. Current growth rates increase your available funds by around 5.6% annually (but increase equal to any annual interest rate adjustments). After a year, the $307,000 qualified for on my clients’ RM will become over $324,000 because of the LOC growth rate. You can read more about the credit line growth rate HERE.
In the end, you have to evaluate your personal situation; whether you have a high loan balance, what you plan to do with the money, how soon you need to access your equity, and how much you need to take out before you can decide which option is best for you. Typically, those with a high mortgage balance will choose a fixed rate reverse mortgage and those with lower or no current loan balance will choose an adjustable rate so as to not accrue interest as fast. You can click HERE to link to a reverse mortgage calculator and see the what a fixed rate or an adjustable rate option will do for you.