Archive for March 2008

My Thoughts about Fixed Rate Reverse Mortgages

March 6, 2008

j0309031.jpgEver since I started offering reverse mortgages about 3 years ago, one of the most common requests were for a fixed rate reverse mortgage. The look on my clients face when I told them that the reverse mortgages were all adjustable made me cringe. “I don’t like adjustable rates,” was a common statement. “They just make me nervous,” says another. I often gave them hope in that a fixed rate reverse mortgage was on the horizon. Well, for a conventional mortgage, adjustable rates can make people nervous. But for reverse mortgages, it really makes a lot of sense given the way that fixed rate reverse mortgages have been set up.

After following the fixed rate reverse mortgage products for several months, it is becoming more and more apparent that it is not the great deal we were all hoping for. Limitations and risks are a big part of this product.

When we take into consideration that the required lump sum draw requirement is often many thousands of dollars, I am not sure it is a wise move. The only way I could see it being beneficial is if: a) there is an investment (low risk) plan that the client has discussed with a financial advisor, 2) the borrower has to bring money to the table in order to close the loan, 3) if the rate gives the borrower a peace-of-mind about their future equity.

If any of the above are not true, then it would take a lot to convince me that it is the right move. If you simply do the calculations you will see what I mean. Interest will accrue much quicker on a $100,000 than on, let’s say, $20,000. If this is done year in and year out, it will eat up the equity at a faster rate . . .  something that we don’t want to see with our clients. However, if that $100,000 has been placed in an appropriate financial product (I stress . . . . with a knowledgeable financial professional that cares about your money more than his/her wallet) that earns tax free interest, etc. then hopefully you will have made up any interest that has accrued on the reverse mortgage. In this type of situation, then it may make sense to consider a fixed rate reverse mortgage.

If the borrower has to bring money to the table at closing, then it certainly makes sense. In this case there is no money to take out in the lump sum, so it doesn’t increase the amount in which interest is accruing on. Secondly, if the client is at all concerned with their equity being consumed, then it makes even more sense.

One last thought that is a concern. The fixed rate, in most cases, cannot be locked until just prior to closing. This allows a bit of risk when the interest rate spikes. For someone that doesn’t like surprises, this makes me nervous for my clients. A small difference in the interest rate may wipe out a good chunk of available cash for the lump sum. For those who are bringing money to the table, it increases the amount they would need to bring . . . .  ugh. I don’t feel good about that at all.

Overall, I really don’t like the fixed rate option. In a small number of cases, it may make sense. But as a rule, be very, very careful!