Fixed Rate Reverse Mortgages Have Disadvantages

10/12/2007

posted by N. Sioris

Stumble It!

Fixed rate reverse mortgages have been introduced recently through FHA/HECM as well as proprietary products from various private lenders.

But before you get all excited, you should really take a moment to compare the fixed rate offerings to the more traditional reverse mortgages that were customarily adjustable rate loans. I know what you're thinking: Most of us want a sure thing, we don't want any changes down the road.

As older Americans, we don't feel comfortable with uncertainty. But, guarantees come at a price. In the case of fixed rate reverse mortgages, the price comes in several ways. Number one, the interest rate will be higher than on an adjustable rate. And two, that means that you will get a lower loan amount to draw your money from.

Since the lender is going to guarantee you a "fixed" rate, they will pass on the market risk to you. The lender is too smart to offer you the lowest fixed rate available in the market today, since the lender has no way of knowing how long you will keep the reverse mortgage. Therefore, the lender will factor in a cushion for taking interest rate risk over your life expectancy or the life of your reverse mortgage loan.

So you see there are no free lunches. If you opt for the adjustable rate reverse mortgage, you will be riding the market not the lender. Therefore, the lender feels more comfortable offering you the current market interest rate when you close your reverse mortgage, knowing that as the market goes up and down over the years, so does your reverse mortgage interest rate. Wallah! No interest rate risk. Consequently, the lender will give you a larger loan amount today and today's current interest rate, not some rate that is higher than the current market rate.

Find out more about your options and request a comparison between what would be available to you on both an adjustable rate and a fixed rate reverse mortgage. You will be surprised at the difference in the figures.