Fixed vs. Adjustable Reverse Mortgages, A Complicated Problem

In the latest in a series on reverse mortgages, Jack Guttentag, also known as “The Mortgage Professor,” writes for Inman News about the difference between the fixed rate and adjustable rate reverse mortgage products that are available today. The topic has been widely discussed lately with the introduction of the Home Equity Conversion Mortgage (HECM) Saver, and as the result of recent studies indicating that today’s borrowers are opting for the fixed rate loan seven times out of 10. 

The question of which product is right is not so simple, Guttentag writes, but he does provide a detailed breakdown of the products and the likely reasons borrowers are choosing each one. 

The Mortgage Professor reports

Advertisement

FHA-insured reverse mortgages, called Home Equity Conversion Mortgages (HECMs), can be a life-saver for elderly homeowners short of income. While aftershocks from the financial crisis have caused the amounts that homeowners can draw under the program to be reduced, as discussed in my previous articles in this series, borrowers now have more options than they had before the crisis….

About two-thirds of all HECM borrowers today are opting for FRMs, which is the best choice for borrowers who want to draw as much as they can as quickly as they can. This includes those purchasing a house with a HECM, who usually want to pay as much of the price as they can with HECM proceeds. (Note: The HECM for Purchase program, another recent innovation, is discussed next week).

The borrower who takes a HECM FRM knows at the outset exactly how his debt will grow. If in several years interest rates and house prices begin to rise, which is widely expected, the debt of the borrower with a HECM FRM will rise at the same fixed rate. If the borrower maintains the property and pays the taxes, an attractive refinance opportunity will arise. That’s the case for the HECM FRM.

…I would like to be much more specific about the circumstances in which an ARM would work out better than an FRM, and vice versa, but it turns out to be a very complicated problem that requires modeling to fully understand. I’m working on a calculator that hopefully will provide more precise answers.

Read the original article on the Mortgage Professor’s website. 

Written by Elizabeth Ecker

Join the Conversation (1)

see all

This is a professional community. Please use discretion when posting a comment.

  • Jack hits in some cases but misses in others.  The article is far too short to do an adequate job of achieving its goal.

    As to upfront MIP, Savers seem too good for even Jack to believe.  The cost is one-tenth of what he states as 0.1 percent; instead it is 0.01 percent of the Maximum Claim Amount.

    Jack states:  “As interest rates rise, the unused portion of the line will increase at a faster rate, more than offsetting the increased growth rate of their debt.”   How in the world does the growth rate on the line of credit impact the growth rate on the debt?  Jack just does not get it.

    Jack goes on to say:  “Borrowers who want a stream of income, either for life or for a specified period, also must select an ARM because this option is not available on an FRM.”  Jack, say it ain’t so.  Even Jack misses the point that proceeds have to repaid.  Since when are HECM tenure payouts for life of the borrower?  Tenure payouts are for the life of the LOAN, i.e., until termination of the loan.  The longest tenure payouts can go is to the date of death of the last surviving borrower.

    In a word like other promoters, Jack is CONFUSED!!!

     

string(104) "https://reversemortgagedaily.com/2012/07/22/fixed-vs-adjustable-reverse-mortgages-a-complicated-problem/"

Share your opinion