A reverse mortgage is a type of mortgage loan which is available to seniors over 62 years old. Reverse mortgages allow the qualifying home owner to convert part of the equity in the home into cash. The reverse mortgage loan is only paid after the home owner dies in one of three ways: the heirs pay back the loan, the home is taken by the lender, or the home is sold by the heirs, who can cash out the remaining equity this way. The mortgage on the home must be low enough to be covered with the money received from the reverse mortgage, and there are no income or credit score requirements.
The money received from the reverse mortgage loan is not taxed and can be used at the discretion of the borrower. The amount of money that can be taken out is determined by the property value, the borrower’s age, the interest rate, and the type of loan, fixed or adjustable rate.
Fixed vs. Adjustable
Determining which of the two types of reverse mortgage loans is best for you depends entirely on your reason for wanting to take out a loan. If for example, you wish to pay off your mortgage, you will most likely take out a fixed-rate reverse mortgage loan, which allows you to receive the whole borrowed amount at once. If you need the money for repairs, improvements, or other things, you can choose to take out an adjustable-rate reverse mortgage loan, in which case you will receive an amount of money each month for as long as you live in the house. The amount that you can borrow for both types of reverse mortgage loans is determined by the age of the youngest borrower.
Besides the age of the youngest borrower, several other factors are used in determining how much you can borrow. The value of the home and current mortgage rates also come into play when determining the amount of money that you will be able to get, whether you are taking out a fixed or an adjustable-rate reverse mortgage loan.
The rates on your reverse mortgage loan are calculated according to the London Interbank Offered Rate (LIBOR) index, which is the rate that banks lend to each other. A margin is added to this rate by each lender. Margins can differ slightly from lender to lender, but even a small, less than 1 percent difference can mean a lot of money over time.
Advantages and Disadvantages
The main advantage of a fixed-rate reverse mortgage loan is that the interest rate will remain the same for the duration of the loan, and interest rates are really low at the moment. The disadvantage of the fixed-rate reverse mortgage is that you must receive the whole amount and, while this doesn’t sound like a problem, you will be charged interest for all of the money.
Another advantage with an adjustable-rate reverse mortgage loan is that it is very flexible. You can take out what you need, then pay it back, and take out more money when needed. The disadvantage, as with all adjustable-rate mortgage loans, is that, due to the economy increasing, there is a good chance that the interest rates on your loan will increase.
Choosing between a fixed-rate and an adjustable-rate mortgage loan largely depends on what you need money for. If you need a large amount of money, then fixed-rate is the best choice. If you need a monthly check, then adjustable-rate is by far the best choice. Interest rates will change for the adjustable-rate reverse mortgage, but it is not the only factor that should matter when deciding which type of loan to choose.