Fixed or Adjustable, Which is Best?
With the HECM (Home Equity Conversion Mortgage) there are all sorts of opinions today about which rate is best, fixed or adjustable. And the opinions come from all sides of the aisle. From attorneys to borrowers to Reverse Mortgage originators. So which is it? It’s both. It all depends on need.
If you’re looking for a monthly check (or direct deposit) of proceeds or a line of credit or a combination, you won’t have those options with the fixed rate. Of course you can’t be barred from getting a fixed rate with options, but the interest rate would be very high. And the amount per month will be less. It just doesn’t make sense to choose a fixed with those options.
Everything depends on the reasons why you are getting a Reverse Mortgage. If you’re thinking about setting up a line of credit to pay the taxes on your home, or if you want extra money each month, or you want a line of credit with monthly checks to you (modified tenure) the adjustable HECM is best.
The interest rate is still good, and the hit to your equity will not be as large as with a fixed rate which is now anywhere from 5.8% to 7%. Remember, with the fixed rate you draw all the monies at closing — no matter how high the amount. So if you qualify for $230,000 cash at closing, that’s what you’ll have to draw out. And the interest starts ticking on that amount plus the closing costs. If you home does not go up in value, and if you live a long time, the equity in your home could be gone.
This is why it’s important to compare programs with a Reverse Mortgage Specialist. It doesn’t take a brain scientist to figure out why someone would choose a fixed rate Reverse Mortgage (although most borrowers choose the FHA adjustable). It’s usually fear – fear of the adjustable rate mortgage (ARM). But sometimes a borrower will choose a fixed rate (taking all the proceeds at closing) for purposes such as investing or buying another home such as a vacation home. There are times when it makes sense to choose a fixed rate, but in five years of doing Reverse Mortgages I’ve had only two borrowers choose it. These borrowers refused the adjustable due to fear of adjustable rates. And it is true that the cap on it is 10% over the current rate.
However, do your homework. Talk to the right people. Look at the historical data to see how interest rates have changed over the years (maybe do a ten year history). Look at the the 1 year CMT and the 1 month LIBOR. Do a search on Google for “historical index” on each. Actually, www.Mortgage-x.com has a page dedicated to checking the history of an index.
Keep studying! It sure helps.
