I’ve been working with Louise and her daughter for about a month. She came to me interested in learning about a reverse mortgage and was considering getting one for herself. She was also talking to a large reverse mortgage company who was strongly advocating the fixed rate lump sum option. I met with Louise and her daughter in her home and we discussed her situation, explored her attitude about equity, her thoughts about planning for the future and what she is trying to achieve. We looked at various reverse mortgage options with that in mind. After getting rid of her mortgage payments, she felt she could get by pretty well and when home repairs come along, she will have funds in her reverse mortgage line of credit to take care of them. She especially liked the growth in the line of credit based on that same adjustable rate that is charged on the loan balance. If interest rates go up, so would the rate of growth on her available line of credit. So ultimately, she would receive more funds with this option than the fixed rate lump sum option.
We looked at the FHA HECM standard and saver options with fixed and variable rates. Louise and her daughter really liked the idea of a fixed rate and today’s low interest rates are very appealing. I explained that with the fixed rate option, you must take all of the available funds when the reverse mortgage loan closes. So I suggested they hear me out and look at the other option which allows you to take the cash you need now, in her case to pay off the existing mortgage balance and leave the rest in a line of credit to access in the future and funds could also be paid out in a regular monthly payment to her. They both loved the idea of a line of credit in combination with receiving a regular monthly payment. It seemed perfect. But for the line of credit option, she would be required to have a variable interest rate. She didn’t like the idea of an adjustable interest rate. All of a sudden this decision wasn’t so easy. Should she get the fixed rate she wants even though she would have to take a lot of cash she didn’t need right away? Interest would be charged on the entire loan balance which causes that balance to increase more rapidly. Louise wants to choose the option that preserves her equity in the best way possible and she also wanted to have the most funds available.
I suggested she think differently about variable interest rates than she had in the past. Now we need to think in the reverse world. Adjustable rates or ARM mortgages on a reverse mortgage do not have the same risk as with conventional mortgages. If your rate increases with a regular mortgage, your payments also increase. But with a reverse mortgage, you don’t have to make mortgage payments so you don’t have the risk of high monthly payments if rates increase. If the variable rate goes up with a reverse mortgage, equity decreases more rapidly.
In Louise’s case, her loan balance would be much lower than the fixed rate lump sum option, so even if rates go up, the charges would be against a smaller loan balance. Also, the variable rate started at 1.5 percentage points less than the fixed rate. She reviewed a custom amortization schedule I prepared that projected the future loan balance based on her own input. We included the draws she planned to take, her estimate on how interest rates would increase in the future and her estimate of her future home appreciation at 2% annually. We compared this amortization schedule with the lump sum fixed rate schedule and she had more available funds and retained equity with the line of credit option when comparing examples. She decided her priority was to have the most available funds over time. She and her daughter felt it was more important for her to have money available through her lifetime and concluded the equity remaining after her passing was a low priority.
The fixed rate option can certainly make the best sense for many people, especially boomers and seniors who have high mortgage balances and NEED the lump sum of cash. What I am encouraging is to look deeply and evaluate the options based on your personal needs and situation. I suggest you explore options thoroughly. It takes time and effort, but a reverse mortgage an important financial decision and deserves to be fully explored and researched.
If you live in California or Nevada and would like to review and compare custom reverse mortgage amortization tables, please give me a call or send an e-mail. I can be reached directly at 800-684-9438 or Maggie@rmstore.net.