Should You Consider A Fixed Rate Reverse Mortgage?
Should You Consider A Fixed Rate Reverse Mortgage?
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Home Page > Finance > Real Estate > Should You Consider A Fixed Rate Reverse Mortgage?
Should You Consider A Fixed Rate Reverse Mortgage?
Posted: Sep 10, 2009 |Comments: 0
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A fixed rate reverse mortgage removes the uncertainty associated with adjustable rates. While an adjustable rate mortgage often seems less expensive, the borrower is has no way of predicting what interest rates will do in the future. Fixed rate mortgages may seem more expensive at the outset, but are often less expensive over the long term.
Fixed Rate Reverse Mortgage Pros and Cons
A major drawback of fixed rate reverse mortgages is that they require the borrower to take the payment from their reverse mortgage as a lump sum. In an adjustable rate reverse mortgage, the borrower may choose from several different options. A line of credit reverse mortgage allows the borrower to request funds as needed. This option allows the borrower to access the most equity from their home. A monthly payment option provides the borrower with a source of monthly income that will continue for the remainder of the person’s lifetime. Because of the high interest rates, the lump sum option for reverse mortgages is generally regarded as the least attractive. Additionally, holding the lump sum in a bank account could make it difficult to qualify for government-subsidized programs.
The guarantee and predictability of a fixed rate, however, is a powerful incentive. For many seniors, the sole drawback of a reverse mortgage is that trading cash for the equity in their homes means that there is less inheritance to pass on to their children. With a fixed rate reverse mortgage, the borrower knows exactly how much they are borrowing and what the cost to the estate will be when it is time to repay the loan. For this reason, a fixed rate reverse mortgage can be very attractive.
For a senior trying to decide if a fixed rate reverse mortgage makes sense, there are several considerations.
Why do you want the money?
Many elderly people that have lived in their home for many years are in a unique position. They have a nice home that is paid off in full. They may have a sufficient monthly income to live comfortably, but not enough to save for extras, such as home repairs or annual property taxes. In cases like these, a reverse mortgage can meet the needs of the senior perfectly.
Is there sufficient equity in the home to generate the money you need?
If the senior bought a home later in life, there may not be sufficient equity in the home for a fixed rate reverse mortgage to make financial sense. In a reverse mortgage, there cannot be any other mortgages or liens on the property. If there are, they must be paid off in full from the initial proceeds of the reverse mortgage. The cost of the loan’s closing is also taken from the proceeds of the reverse mortgage. It is important to know exactly how much money will be available to you after all of these expenses are paid. There is no reason to tap into the equity in your home if a great percentage of the income will go toward bank fees.
Do you have excess monthly income that could repay a traditional loan?
Many people, whether they are retired or not, use a traditional home equity line of credit to meet financial needs that fall outside of ordinary monthly expenses. The advantage of a traditional home equity loan is that the interest rate and loan costs are typically lower than the rates associated with a fixed rate reverse mortgage. The disadvantage is that you must begin to repay the loan immediately, unlike a reverse mortgage. If there is some extra room in your budget to repay a home equity loan, this may be a good choice. But if your income is already stretched to the limit, a reverse mortgage will cause less financial strain.
Are you willing to discuss these issues with the executor of your will?
It is important that you make the financial decisions that work best for you, but, if you are considering a reverse mortgage, it makes sense to discuss it with the person who will be responsible for settling your estate. When you pass away, the loan repayment will come due. This means that someone will need to repay the loan or stage your home so that it can be sold. It is only fair that the person who will shoulder this responsibility knows what to expect before the time comes.
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Lucinda Jones -
About the Author:
Lucinda Jones is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as a reverse mortgage.
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Questions and Answers
Ask our experts your Real Estate related questions here…200 Characters left
With a reverse mortgage is there a limit on the withdrawl amount per month for a person with medicaid?
When a person with a reverse mortgage and medicaid dies,do both receive some of the proceeds when the house is sold?
What happens to the property when a senior sets up a reverse mortgage upon her death so her son can live in the home and then he is incarcerated for life?
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reverse mortgage, mortgage rates, real estate, mortgage quote, adjustable rate mortgage, credit, line of credit, home equity, mortgage rate, mortgage insurance, home mortgage lender, mortgage loan, mortgage backed securities, mortgage fees, home loan, fir
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