The reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), is a flexible financial tool that comes in many shapes and sizes. Two of the most popular HECM products, known as the Fixed Rate HECM and Variable Rate HECM, offer different advantages and disadvantages that are worth considering for any prospective reverse mortgage borrower.
Describing the Fixed Rate HECM
By distributing funds as a lump sum and locking the interest rate in place at the time of closing, this loan provides a simple solution to pay off mortgage balances (though you still pay property taxes and insurance), pay property liens, handle medical bills, make home repairs, or pay for living expenses while other assets have more time to possibly appreciate in value. Fixed rate HECMs will eliminate the uncertainty of an adjustable rate, meaning that you’ll know the interest rate for the entire lifespan of the loan. In return, these loans will only allow disbursements via lump sum.
Basics of the Variable Rate HECM
Also known as the adjustable rate HECM, this flexible loan allows borrowers to access their proceeds through a variety of options. The rate on a variable rate HECM can change year to year depending on market conditions. Borrowers may withdraw a lump sum, leave funds in a line of credit that may grow over time if unused, choose to receive monthly payments, or combine any of these options. The line of credit in particular is effective for preparing for emergencies and gradually building an accessible resource that, in some circumstances, may even exceed the value of your home. Because the line of credit allows borrowers to use the reverse mortgage as a retirement tool, it can serve as a valuable addition to your retirement plan.
Which One is Right for You?
Which type of HECM is best suited for your particular situation? While fixed rate HECMs are most often used to access your home equity for immediate use, variable rate HECMs are more commonly used to provide a safety net for unexpected. However, in a tumultuous economy, many borrowers are gravitating to the variable rate HECM in order to get a line of credit and prepare for the future.
Since both versions are insured as by the Federal Housing Administration, you can take solace from the fact that the government has secured these loans. Even if your reverse mortgage lender (usually the company that originates your loan) goes out of business, your money will still be given to you thanks to the FHA. Of course, no substantial financial decision can be made easily. That’s why we recommend that all prospective borrowers carefully evaluate all possible options before making a decision. If you’d like more advice on your particular situation, consider speaking with a licensed financial advisor.