Fixed rate and adjustable rate options apply to both reverse mortgages and forward mortgages, but the similarities stop there, writes The Mortgage Professor in an article this week.
Published on bis blog as well as in several publications around the U.S. The Mortgage Professor, a.k.a. Jack Guttentag, addresses the differences between an adjustable rate as it applies to a forward mortgage versus the way it applies to a reverse mortgage.
The consequences of a rate change are very different, he explains, given that for forward mortgages a rate changes is most often associated with a change in payment. With a reverse mortgage, he continues, the rate at which interest accrues changes, but since there are no mortgage payments, there’s no change in payments when the rate changes.
The Mortgage Professor also details the differences in rationale for choosing a fixed rate or an adjustable rate—which vary strongly between a reverse mortgage and a standard forward mortgage.
Finally, the article discusses the different reasons for choosing an adjustable rate reverse mortgage or a fixed rate reverse mortgage, which Guttentag says depend largely on the goals of the borrower.
“The fixed rate HECM reverse mortgage is primarily for seniors who plan to use all or most of their borrowing power right away,” he writes. “Their intent is to pay off an existing mortgage, buy a house, purchase a single-premium annuity, or transact for some other purpose that requires a large and immediate payment….The adjustable rate HECM allows seniors to draw funds at closing, and also to draw funds after the closing. Such borrowers are able to plan for their future in a way that those who take a fixed-rate cannot.”
Written by Elizabeth Ecker