Fixed or Adjustable? That is The Question.
Are FHA HECM (Home Equity Conversion Mortgage) Fixed Rate Reverse Mortgages a better deal throughout the years for borrowers based on historical information, as compared to HECM Adjustable Rate Reverse Mortgages at today’s interest rates? Let’s take a closer look.
If you look at historical information for the last 10 years (the average term for a HECM Reverse Mortgage loan is 7 years), the borrower with a HECM LIBOR adjustable rate reverse mortgage would have an average interest rate of 6.29%. This is based off of a LIBOR margin of 3.0 combined with the last 10 year average (3.29%) of the LIBOR Monthly Index, the HECM 1 -month LIBOR. Today the HECM LIBOR 300 (adjustable HECM) has an Initial Interest Rate of 3.31%, however adjustable monthly HECM’s have a lifetime cap of 10% above the initial rate, so the Interest Rate Cap is 13.31%. The lowest HECM Fixed Rate Reverse Mortgage available today is at 5.56%. Now let’s look at the difference in proceeds between the HECM Fixed and HECM Adjustable programs by using a Reverse Mortgage Calculator:
Sample Loan Comparison for a 70 year old borrower with a $200,000 home:
HECM Fixed HECM 275 HECM 300 HECM 325
Available $122, 466.38 $100,000.00 $96,172.03 $91,894.02
After Fees
As you can see, the HECM Fixed Reverse Mortgage offers borrowers the most money. If you’re looking to maximize the amount of money that you get out of a HECM Reverse Mortgage, the HECM Fixed Rate is your best bet. There are some disadvantages of a HECM Fixed Rate Reverse Mortgage. The main shortcoming of the HECM fixed is that it requires borrowers to make a full draw at closing. This means that you begin accruing interest on the full amount of the loan from the very first day. Because of the other options the adjustable rate mortgages allow, which include the line of credit, monthly payments and any combination, interest is not accrued until you actually receive the money. This way, you are only taking money as you need it, preserving more of your equity over time.
Closed End vs. Open End Credit
Closed End Credit – A loan or extension of credit in which the proceeds are dispersed in full when the loan closes. Borrowers with a closed-end loan will not be able to draw any additional funds unless they refinance. Borrowers may pay back any money they do not want at closing, but they will no longer have access to the money.
Open End Credit (Revolving) – Line of Credit where no restrictions (other than the maximum credit limit) are placed on withdrawals and repayments. Any amount repaid is available for re-borrowing. Borrowers with an open-end loan may make payments, decreasing the outstanding balance and therefore increasing the principal balance available to the borrower for future use.
Why is the Line Of Credit Option Not Available For The Fixed Rate Program?
From a secondary marketing perspective, investors are more at risk if a Line Of Credit structure is used, because at the time borrowers draw funds the market rate can be drastically different. This means investors are lending money at “non market” rates.
· So, for that issue, the structure of a HECM Fixed Reverse Mortgage must be such that it is a one-time draw.
· HUD does not allow for Fixed HECM products from which only a portion is drawn. In other words, you can’t say “I just want x amount of money.” What’s left of x has to go on a Line Of Credit, or be disbursed as payments, which is undesirable for investors with a HECM fixed rate. A HECM Fixed Rate Loan with a Line Of Credit is worthless in the secondary market and as such, the pricing makes it worthless to a consumer.
In closing, I encourage you to look at the HECM Fixed when exploring your Reverse Mortgage opportunities. The HECM Fixed Rate provides you the maximum benefit combined with the security of a fixed rate that is not subject to the monthly interest rate adjustments that come with ARM products.
Stay In Home Mortgage is currently the largest independent reverse mortgage broker in Washington , Oregon , Idaho , and is also recognized as a Top 25 Reverse Mortgage Provider in other states such as California, Arizona, Nevada, Hawaii, New Mexico, Utah, Florida, North Dakota, Minnesota, Michigan, Alaska and Colorado.
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