Fixed or Adjustable Rate Massachusetts Reverse Mortgage?

When you are considering a reverse mortgage, your interest rate will be a significant part of the decision. There are pros and cons for both a fixed and adjustable.  I will get into breaking down the differences to help you understand how the rates are determined, the options for borrowing your money, and prepayment differences.

Interest rates, whether fixed or adjustable, will impact you in 2 ways.  First, it will determine how much the loan will cost you.  Second, it will be used in calculating how much you qualify for.  You can go to our page on reverse mortgage interest rates to get a more detailed breakdown of the rates involved.

When considering the costs of a reverse mortgage it is important to evaluate the interest rates and how they will impact your situation.  Besides interest rates, you also need to consider servicing fees and closing costs.  All three of these factors need to be analyzed when considering the costs of a reverse mortgage.  Here In this blog, we are only going to discuss interest rates.

The biggest difference with interest rates will be whether you choose a fixed rate or adjustable rate reverse mortgage.  Fixed rate reverse mortgages do require you to borrow 100% of the proceeds at closing.  If you are not paying off a large mortgage, or have an immediate need for the monies, this may not be the best option for you.  If someone is encouraging you to invest the monies, we strongly urge you to walk away.  This is not a good investment.  If there is additional money you are required to pull out you may want to consider a CD or Money Market to offset a small portion of the interest.  You should also contact a tax advisor as any interest earned could have tax implications.

If you do not have to pull the majority of the monies out, then you are more likely better off with an adjustable rate reverse mortgage.  This would allow you to only take what you need when you need it.  Interest will only accrue on the monies you stick in your pocket.  The unused monies can be set aside in a Line of Credit or used as a Monthly Advance.  This will give you a lot more flexibility in how you use your monies available.

The last thing I would like to cover is the ability to partial pre-pay a reverse mortgage.  You need to understand a fixed rate reverse mortgage is a closed-end mortgage and an adjustable rate reverse mortgage is an open-end mortgage.  If you make partial prepayments to a fixed rate reverse mortgage, you will not be able to access those monies in the future.  Yes, it will pay down your loan balance, but those monies will not be able to be accessed.

An adjustable rate reverse mortgage is an open-end mortgage.  If you decide to make partial prepayment s, it will pay down your existing loan balance and will also make those monies available to you in your Line of Credit.  This is a great feature in the event you are required to draw down your minimum distributions in tax deferred investments.  It allows you to pay down your loan balance, while not losing access to those monies in the future.  We encourage you to work with your financial planner when considering this option.  We work with many planners implementing such strategies, which help to maximize your liquidity and make your monies last as long as possible.

Interest rates are only one consideration when deciding which options are best, and we will get into further discussions of other costs to consider when choosing a reverse mortgage in future blog posts.  Thank you for reading our discussion on fixed or adjustable rate with a Massachusetts reverse mortgage.

Is the Credit Crunch Effecting Reverse Mortgages?

Everyone I talk to asks me how the credit crunch is affecting reverse mortgage. This is a great question as there are many different aspects of the credit crunch which are helping reverse mortgages and other aspects which are having a negative impact.  Home value is one factor impacting reverse mortgages.  Due to the increased amount of foreclosures and distressed sales, the Fair Market Value of homes has significantly declined over the last 12 months.  We have witnessed home appraisals ranging from 5% to 30% below tax assessed value.  Since many towns base their tax assessment valuations on sales from the prior year many will not be representative of current market value.  It is important to know this if you are considering selling or refinancing your home.

Another significant impact to the reverse mortgage industry is the disappearance of the Proprietary Reverse Mortgage.  Historically, 90% of reverse mortgages have been the FHA HECM (Federal Housing Authority Home Equity Conversion Mortgage) reverse mortgage.  Today, almost 100% of reverse mortgages are the FHA HECMs as it is the only option available in most states.  The FHA HECM has been and is more popular for many reasons but primarily due to being federally insured.  The federal guarantees provide safeguards to both the borrower and the lender.  The importance of this is if the home can no longer repay the monies borrowed, the homeowner nor the estate, will be personally responsible.  FHA assures the bank is made whole and no other assets can be utilized for repayment of the loan.  This is why lenders are willing to lend money through the FHA at the low interest rates we are witnessing today.  With a Proprietary Reverse Mortgage the lender still cannot take recourse against the estate, but the lender will have to take a loss itself if the home can no longer repay the loan.  This is a risk lenders are not willing to take in today’s market.  This is why interest rates on the Proprietary Reverse Mortgages are usually higher as the bank has to take on the risk themselves.  The Proprietary market will return, but it will depend on how long it takes the credit markets to stabilize.

Welcome to Senior Equity Financial’s Blog!

We would like to welcome you to Senior Equity Financial’s blog. Our goal is to keep you up to date on the reverse mortgage industry, as well as, other topics affecting homeowners and your retirement.  We welcome your feedback or suggestions on topics you may be interested in.  We will do our best to address any questions you have.  Thank you again for visiting our website and we look forward to speaking with you soon.