HUD Says Fixed Rate Reverse Mortgages Not Always Best Choice

6/16/2008

posted by N. Sioris

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HUD has come out with new guidelines for HECM reverse mortgage counselors. HUD says that fixed rate reverse mortgages are not always the best option for seniors. To that end, HUD is now requiring that HECM counselors highlight the risks related to fixed rate HECM's during reverse mortgage counseling sessions.

HUD says that there are several risk factors that make a fixed rate HECM a poor choice for many seniors. HUD said that clients should be made aware of the following risks when opting for a fixed rate over an adjustable rate HECM.

1. Fixed Rate HECMs often have loan rates considerably higher than the current adjustable rate HECM loans. The senior's total interest cost over the life of the loan may be considerably higher for a fixed rate vs. an adjustable rate HECM.
2. Because fixed rate HECMs generally will have higher interest rates, the current amount of proceeds available from a fixed rate HECM may be lower than the proceeds available from an adjustable rate HECM.
   
3. Reverse Mortgages versus Traditional Mortgages: Borrowers should carefully evaluate the reasons for selecting a fixed rate HECM. With a traditional mortgage, borrowers tend to prefer fixed rates due to the certainty of the monthly mortgage payment to be made. In a reverse mortgage, borrowers remain in their homes while enjoying the use of their reverse mortgage loan proceeds and are not required to make monthly payments. Over the long run, managing interest rate risk may be much less important than maximizing upfront proceeds and obtaining a lower initial loan rate.
   
4. Borrowers desiring a fixed rate HECM will receive a closed-end loan. Borrowers with a closed-end loan will not be able to prepay the loan and draw any additional funds.
   

Before deciding whether any type of reverse mortgage is right for you, it is best to do your research in advance. Make sure you have a pretty good understanding about reverse mortgages before setting up an appointment for HUD counseling. That way, when you attend your session you will be prepared to clear up any questions or concerns that you may have, not only about fixed vs. adjustable, but anything else that you are uncertain about. For more information about HUD Counseling click here.