Key Takeaways
- Fixed-rate reverse mortgages require you to take all available funds as a lump sum upfront.
- Adjustable-rate loans offer the flexibility of a growing line of credit and monthly payments.
- Over 90% of borrowers choose the adjustable rate because of its superior flexibility.
\n\nWhen you apply for a traditional mortgage, you usually want a fixed interest rate. Knowing your monthly payment will never change provides massive peace of mind.
When you apply for a reverse mortgage, the logic is entirely reversed. While fixed rates are available, the vast majority of seniors choose an Adjustable-Rate Mortgage (ARM). Here is why the rules of traditional finance do not apply to HECMs.
The Fixed-Rate Restriction
In the past, you could get a fixed-rate reverse mortgage and still have a line of credit. However, HUD realized this was too risky. Today, if you want a fixed-rate HECM, you are subjected to a massive restriction: You must take a single, lump-sum payout at closing.
You cannot have a line of credit. You cannot have monthly tenure payments. The lender gives you a check for whatever you are allowed to borrow, and the transaction is done.
As discussed in previous articles, taking a massive lump sum means you are instantly compounding interest on a huge balance, draining your equity at the fastest possible speed. A fixed-rate is only appropriate if you are using 100% of the reverse mortgage proceeds to pay off an existing traditional mortgage.
The Power of the Adjustable Rate
If you choose an adjustable-rate HECM, your interest rate will fluctuate based on the broader financial markets (usually tied to the SOFR index).
While a fluctuating interest rate sounds scary, remember: You aren't making monthly payments. An increasing interest rate does not impact your monthly cash flow; it simply means your loan balance grows slightly faster.
In exchange for accepting this floating rate, HUD grants you the ultimate flexibility: - You can leave the money in a growing Line of Credit. - You can set up guaranteed Tenure Payments for life. - You can change your payout method at any time for a $20 fee.
The Bottom Line
If you owe $200,000 on your current mortgage and are using a reverse mortgage to pay it off entirely so you can stop making payments, a Fixed-Rate might make sense to lock in your debt cost.
For literally any other scenarioā€”whether you want a safety net, need to fix the roof, or want extra monthly incomeā€”the Adjustable-Rate is the only logical choice due to the strict HUD restrictions on fixed-rate payouts.\n