With Reverse Mortgages you have two basic loan options. The options are the Traditional Fixed Rate Reverse Mortgage or the Growth Line of Credit. Both have pros and cons and the right choice really depends on your specific situation.
General HECM Benefits:
Regardless of which HECM loan you go with the general benefits is pretty much the same. The benefits include but are not limited to:
- No required mortgage payments as long as you live in the home.
- You will continue to pay Property Taxes, Insurance, HOA’s, etc.
- Potential available funds at closing depending on how much equity you have in the home
- More financial Freedom and Flexibility
So although the general benefits are the same, the differences are in the functionality and flexibility.
Fixed Rate Reverse Mortgage:
The basic idea of the Fixed-rate Reverse Mortgage is it’s a set it and forget it, model. The interest rate is fixed for the life of the loan. FHA’s current guidelines cover the youngest homeowner until age 150. Other features are:
- If you are refinancing and have sufficient equity after paying off an existing mortgage you will receive a lump sum payment at closing of what’s allowed and available.
- After closing you cannot receive additional funds without refinancing the mortgage.
Reverse Mortgage Growth Line of Credit:
The Line of Credit is a much more versatile option. Its features include:
- Funds at closing – like the fixed rate you’re allowed to make a draw of available funds at closing.
- Future Draws – unlike the fixed rate you are allowed to make future draws at any point based on the availability of funds.
- Growth of remaining funds – another great feature is that any money not drawn from the line of credit will grow annually by the same interest rate and mortgage insurance rate that is attached to the loan.
- For example, if your rate is 2.9% and your mortgage insurance is .5%, and you have $100,000 available in the Line of Credit. After one year that $100,000 will grow to $103,400.
- This growth continues as long as you leave those funds in the line of credit.
- Non-taxable – Many of my clients love that the funds they get from their Reverse Mortgage are always non-taxable.
- But like almost all Line of Credits, this one has an interest rate that can adjust once a year based on the market.
- Adjustments are capped at 2% max per year, 5% max over the life of the loan.
- For example, if your starting rate is 2.9%, the highest the rate could ever go is 7.9% but it would only get there after a maximum of 2% adjustments per year.
- Generally speaking, these rates will average within 1.5% of the starting rate over the life of the loan.
Which to choose:
Nationally about 90% of all Reverse Mortgages are done under the Growth Line of Credit model. Mostly because it offers lower rates, generally lower costs, and more importantly more available funds. When people can see the financial planning potential of the Growth Line of Credit it generally makes the most sense in helping them to live better.
However, the Line of Credit and adjustable interest rates are not right for everyone. My advice is to go with your heart, if you see the benefit of more money and lower expenses the Line of Credit is great. If you are concerned about your rate adjusting once a year and this will cause you Anxiety when it happens, it may be better to go with the Traditional Fixed rate on your Reverse Mortgage.
Going along with this article is a video on Youtube that illustrates the differences between the Traditional Fixed Rate Reverse Mortgage and the Growth Line of Credit Reverse Mortgage. You can also watch the full version of this informational video on Youtube or our Website.
When you or someone you care about is ready to talk about your Reverse Mortgage options. give us a call. We’re happy to work up your scenarios and show you how we can make your life better with this amazing product.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor?s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770