Fixed Rate vs. Adjustable Rate Reverse Mortgage
This is a classic battle that has gone on for generations. Do you choose a fixed rate or an adjustable rate? If you are a fixed rate person then you are probably already thinking that you know the answer. You are probably wondering why I am even about to go into a discussion talking about the benefits and advantages of an adjustable rate reverse mortgage. We all know that a fixed rate reverse mortgage is the best and only option, right? Wrong! If you give me a couple minutes I can explain why BOTH options are very responsible and exciting reverse mortgage programs. They are just different in terms of how the rates work and how you are allowed to access your money from the reverse mortgage. Whether you are a fixed rate reverse mortgage person or an adjustable rate reverse mortgage person you have come to the right place to weigh your options. After reading this article you will be able to choose the program that works best for you.
Fixed Rate Reverse Mortgage Explained
The fixed rate reverse mortgage program might feel very familiar for many of homeowners who have, or still have a mortgage they are making monthly payments too. The rate is fixed and remains fixed for the life of the reverse mortgage. If you were to review a reverse mortgage amortization schedule you could see exactly what your loan balance would be in 15 years. In this sense the fixed rate reverse mortgage is a very steady program that can offer many advantages for homeowners.
How Can I Access My Money With A Fixed Rate Reverse Mortgage?
The fixed rate reverse mortgage is considered to be a “closed end” loan. What does that mean and how does it affect how I can get my money? Once a homeowner completes the reverse mortgage process and their fixed rate reverse mortgage funds the file is “closed.” This means that there is no option for the loan to remain open and allow a line of credit or monthly payout disbursement option. The only option to receive money with a fixed rate is to receive a lump sum cash payment at closing. Whatever money is available with the fixed rate reverse mortgage will be disbursed and then affectively closed. Although the fixed rate does not offer multiple options of receiving money this one option might be perfect for a homeowner.
Adjustable Rate Reverse Mortgage Explained
The adjustable rate reverse mortgage offers some benefits and advantages that the fixed rate does not which might be attractive to some homeowners. I will explain each of these individually, so that you can get a very clear perception of how the adjustable rate reverse mortgage program works. The adjustable rate reverse mortgage has been around since the beginning of the program over 30 years ago. The fixed rate reverse mortgage was just introduced about 8 years ago. The adjustable rate reverse mortgage also currently accounts for approximately 85% of the reverse mortgages being done today.
How Can I Access My Money With An Adjustable Rate Reverse Mortgage?
In comparison with the fixed rate reverse mortgage being a “closed end” loan the adjustable rate reverse mortgage is seen as an “open end” loan. This means that once the reverse mortgage process is complete and your reverse mortgage funds the loan will stay open allowing for other ways to access your money other than just a lump sum cash out payment. The following (3) options are available with the adjustable rate reverse mortgage. A homeowner can select any one of them, or a combo of all three.
Cash at Closing
This is an option that allows you to receive money immediately after the reverse mortgage funds. You can specify any amount that you qualify to receive initially and we will set it up. Escrow will wire your requested cash amount directly into your bank account.
Line of Credit
A line of credit is money that is available to you at any time, but does not accrue interest, because it is not part of the loan balance. Only after you pull money from the line of credit does it then get applied to the loan balance. This is the most popular option, because it allows you to control your loan balance. Being able to control your loan balance also allows you to control how much interest and MIP is applied each month. In addition the line of credit comes with a great feature that is unlike any other line of credit. There is a growth rate attached, so every month you will see more available money in your line of credit. The growth rate will always be .50% higher than your interest rate and potentially provides a nice additional stream of available money. You can request as little or as much as you want at any time and the money will be wired directly into you bank account.
Monthly Disbursement Payments
A monthly disbursement payment is a monthly payment that you will receive for a set duration of time. This duration of time can be anywhere from one year to the rest of your life. Yes, you can setup a monthly disbursement to be received for the rest of your life. How much you qualify to receive depends on the youngest spouses age and how much equity is in the property. You have the option of starting, or changing, a monthly disbursement payment at any time during the reverse mortgage loan process or even after your reverse mortgage funds.
What Are The Different Adjustable Rate Reverse Mortgage Options?
Once you have chosen that an adjustable rate reverse mortgage might be better than a fixed rate reverse mortgage it is time to narrow down your adjustable rate program. Whether you want a monthly adjusting or an annual adjusting program. Whether you would like a lower margin or a high margin. Not only are the index rates different, but they also have features unique from each other in how they adjust and the different interest rate caps. Let’s now take the final step in figuring out exactly what adjustable rate reverse mortgage might be perfect for you.
Monthly Adjustable LIBOR Reverse Mortgage
This program is based on the 1-month LIBOR index rate. Since this is a monthly program your rate will adjust with the reverse mortgage every month based on the current value of the 1-month LIBOR rate. The monthly reverse mortgage program has a lifetime interest rate cap of 10% over the starting rate. If your starting interest rate was 3.50% then the interest rate can never go higher than 13.50% for the life of the loan. There is no annual interest rate cap, so the rate can readjust to whatever the current 1-month LIBOR is at the time of adjustment.
Annual Adjustable LIBOR Reverse Mortgage
This program is based on the 1-year LIBOR index rate. Since this is an annual program your rate will adjust with the reverse mortgage every year based on the current value of the 1-year LIBOR rate. The annual reverse mortgage program has a lifetime interest rate cap of 5% over the starting rate. If your starting interest rate was 3.50% then the interest rate can never go higher than 8.50% for the life of the loan. The annual reverse mortgage program does have an annual cap of 2% over the current interest rate. If your current interest rate was 3.50% then your rate could never jump higher than 5.50% for the following year.
What Is The LIBOR Rate?
The LIBOR rates are a popular rate that banks use to lend money from one another. It has also become a popular rate for lending programs to use like the reverse mortgage. LIBOR stands for London Interbank Offered Rate. The actual rates are an average of estimated rates that leading banks would use to lend money. It is not only a benchmark rate between banks, but it is the benchmark for reverse mortgage rates. All adjustable rates are based on the monthly LIBOR and annual LIBOR.
Adjustable Rate Reverse Mortgage Margin
The adjustable rates are usually identified by the margin that is associated. What is a margin and how does it function? The margin is a rate that remains fixed for the life of the loan and will never readjust. Our current margins are between 1.00% and 2.50%. These fixed rate margins are added to current LIBOR index rates to configure the current interest rate that will be associated with your reverse mortgage loan. The margins not only have a difference in the interest being applied, but also the credit line growth rate. The higher the margin the more interest will be applied, but also the more money that will be added to the line of credit each month. Or, the higher the margin the more money a borrower can receive as a monthly payment. Again, we come back to our original point that when selecting a margin it all comes back to what your goals are in your reverse mortgage loan. There is no margin that is better than another, but instead there is a margin that is better for your goals than another.
Adjustable Rate Reverse Mortgage Examples
Now that we have identified the different LIBOR index rate programs and margins let’s take a look at a couple examples, so that it makes perfect sense.
Monthly Adjustable Reverse Mortgage Rate Example
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Annual Adjustable Reverse Mortgage Rate Example
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Final Fixed Rate and Adjustable Rate Comparison
We have gone into detail about each of the adjustable rate reverse mortgage programs and the fixed rate reverse mortgage programs. We have talked about the differences that make each reverse mortgage program unique. We have discussed the benefits in hopes that it can become clear which program would be perfect for you. The fact is both programs are great in their own right and they each offer benefits and advantages that can help any homeowner access equity and eliminate monthly debt by not having to pay the mortgage payment out of pocket. We have worked with many homeowners who have championed both the fixed rate and the adjustable rate. Some homeowners like them both so much that they find the decision hard to pick between the two. In any instance the program that they feel works best for them always turns out to be best.