Today I want to take a quick minute and talk about adjustable rate reverse mortgages versus fixed rate reverse mortgages. Most people out there don’t know the difference and they are vast (in regards to reverse mortgages). Obviously everyone wants a fixed rate. A fixed rate is fixed, it always stays the same, it will never change and it’s reliable. A lot of people are afraid to take adjustable rate loans because the rate can do just that…it can adjust. It can go up and obviously you wouldn’t be worried about it going down but it could go up.
With reverse mortgages though, there’s a big difference between traditional mortgages between fixed and adjustable. With a fixed rate reverse mortgage, the borrower is given a lump sum of cash and that’s it. You have to take the money that you are allotted with a reverse mortgage in a lump sum. There’s also some money that you could’ve obtained later with an adjustable that you will lose out on. So they [the lender] will give you that lump sum of cash and immediately start charging you that fixed rate. Most rates are around 5% – anywhere from 4.75% to 5.06% (some even higher). They’re going to give you that lump sum and start charging you on it right away.
If you do want a payment plan such as a line of credit, a term payment or a tenure payment which is a guaranteed payment for the rest of your life monthly, you would have to take an adjustable with a reverse mortgage. The fixed rate only offers that lump sum. Most people don’t like that. Most people would prefer to make that choice on their own. The good thing about the adjustable rate reverse mortgage is that they do have a relatively low cap. The lifetime cap on these loans is 5% above the start rate. Most of the start rates are anywhere between 2-3%…maybe slightly higher than that. So obviously it’s a pretty low rate compared to most HELOC’s today 18% and there are no fixed rate HELOC’s.
So people don’t realize that when they think of a HELOC vs a Reverse Mortgage and they think “I don’t want an adjustable and I would have to take an adjustable to get the line of credit that I want. “ Taking a HELOC will come due at some point first of all – while you’re still living in the home most likely and it can have CAPS the size of 18%. Reverse mortgages are much lower than that and those ARM reverse mortgage products do allow you to take a line of credit, take a term, take a tenure.
If you take a line of credit with a reverse mortgage any money that’s sitting in that line of credit you’re not being charged for because you haven’t spent it yet. As soon as you take a portion of that money out and do spend it or put it in your bank account or do whatever you’re going to do with it, then they can charge you interest on that. But anything sitting in that line of credit, you cannot be charged interest on and it’s actually growing at a rate that currently matches the current interest rate. So let’s say that your current interest rate is 3%. That means that the lender is charging you 3% interest on anything that you spent. But anything in the line of credit is growing at 3%. Everyone says “that’s too good to be true. Why would they pay me money to leave money in there?” When we say it’s growing, it is growing but all it is doing is giving you access to more money. So for instance, if you put a $100,000 in your reverse mortgage line of credit, and after a few years it’s grown to a $120,000 and you spend $120,000, you will owe $120,000. Ok, so to be very clear on that, it’s not earned interest like a CD (Certificate of Deposit), it’s just giving you access to more money over time.
That being said, to many people that seems more desirable than a fixed rate because any money you qualify for, they are going to make you take as a lump sum and immediately charge you interest on all that. With the adjustable, you can put some of that money in the line of credit and on top of that, after the first 12 months, you’ll have access to more money. The government recently has decided to “pace” the way seniors can spend the money on a reverse mortgage. So they’ll give you a lump sum of money that they’ll let you do what you want with, but they’ll only let you spend 60% of that in the first year and the additional 40% after the first 12 months…unless you need more than 60% to pay off a mandatory obligation such as another mortgage that’s on your home.
If you take a fixed rate, you’re only going to get that first 60%. The additional 40% that they (the government) would give you a year later remains as part of your equity. You don’t get access to it. The other downside to the fixed is that if you decide you don’t need all the money that they’re giving you and you pay some back because you can, (there are no pre-payment penalties with reverse mortgages), you can’t get that money back out. Once you’ve paid that money back towards the loan, it’s gone. You’re loan amount is lower and that’s a good thing but you can’t pull the money back out if you had to.
If you do take an adjustable rate mortgage and let’s say you have a line of credit and you decide you don’t need as much money as you pulled out – let’s say you pulled $20,000 and you go “you know what I don’t need $10,000 that I thought I did” you can pay that back and it will go back into the line of credit. You can actually refill the line of credit to its original amount. That’s obviously a good thing because you’ll never know what’s going to happen down the road. For example, you might have your car break-down, you might get a new car, you might need to pay for your grandson’s tuition. You can take that money back out anytime you need.
So, part of this video is just to dispel the fear of an adjustable rate reverse mortgage because it does give you more money, more options on how to spend the money, where to keep it as far as line of credit, term payments, tenure payments. And also they do have that rate cap of 5% above the start rate. So it’s relatively low. It can be a little bit higher than that fixed rate but remember, the adjustable rates are probably going to stay low for a while so you’ll be saving money over time whereas with the fixed rate you’ll immediately be having to owe the interest on that, for example, 5% loan right away – all of it (the whole lump sum). Whereas with the adjustable rate, you can choose as much as you want – you can take none of the money out – leave it all in the line of credit and not be charged interest on anything you don’t spend.
I enjoy making these videos for you. I hope they’re informative.
Again, my name is Brandon Webb for USA Reverse Mortgages by iReverse Home Loans. Please give us a call to learn more.
Direct: (760) 845-5369
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