Reverse Mortgage Interest Rates: Fixed vs. Variable

Interest rates on a Home Equity Conversion Mortgage (HECM) are a frequent source of confusion. Because you aren't making monthly payments, it is incredibly easy to ignore the interest rate—but you shouldn't. The rate determines how quickly your loan balance grows and, conversely, how much equity will be left for you or your heirs down the line.

When taking out a reverse mortgage, you have two main choices: a Fixed Rate or an Adjustable (Variable) Rate. The choice you make fundamentally alters how you can receive your money.

The Fixed-Rate Reverse Mortgage

If you choose a fixed interest rate, the rate is locked in for the entire life of the loan. It will never go up, and it will never go down.

The Catch: FHA rules stipulate that if you choose a fixed rate, you must take all of your available funds as a single lump sum at closing. You cannot have a growing line of credit, and you cannot receive monthly "tenure" payments.

Because of this restriction, a fixed-rate HECM is generally only recommended for seniors who have a specific, massive immediate need for cash. The most common scenario is a borrower who has a large existing traditional mortgage that must be paid off. If the payoff amount consumes all the available reverse mortgage funds anyway, locking in a fixed rate makes perfect sense.

The Adjustable-Rate Reverse Mortgage (ARM)

The vast majority of borrowers today choose the adjustable-rate option because it offers immense flexibility.

The Benefit: An ARM allows you to access your equity in a variety of ways. You can choose a growing line of credit, guaranteed monthly payments for life (tenure), term payments, or a combination of these options.

With an ARM, the interest rate changes periodically (usually monthly or annually). The rate is determined by adding a lender margin (which stays constant) to a financial index (which fluctuates). Currently, most HECMs use the Secured Overnight Financing Rate (SOFR) as their index.

How Interest Accrues

The most important concept to understand with a reverse mortgage line of credit is how interest is charged.

You only pay interest on the money you actually withdraw.

If you open a $150,000 line of credit to use as an emergency fund, but you don't withdraw any money for the first three years, your loan balance is zero (aside from financed closing costs) and you accrue zero interest on that $150,000. If you withdraw $10,000 to fix your roof, interest only begins accruing on that $10,000.

This is why an adjustable-rate line of credit is mathematically superior for most borrowers. If you take a fixed-rate lump sum of $150,000 and put it in your checking account "just in case," you are immediately accruing interest (at say, 7%) on the entire $150,000, while your checking account might only be paying you 1% in interest. You are losing money rapidly.

The Growing Line of Credit

One unique feature of the adjustable-rate HECM is that the unused portion of your line of credit grows over time at the same compounding rate as the loan balance. This means if you leave the money alone, your available credit capacity increases significantly over the years, giving you access to more funds when you are older and potentially facing higher healthcare costs.

Which is Better?

For flexibility, protecting home equity, and securing a financial safety net, the adjustable rate with a line of credit is the superior choice for most borrowers. The fixed rate is a specialized tool for those who need all their cash on day one.