Mortgage Professor: The Fixed vs. Adjustable Reverse Mortgage Debate

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.

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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.”

View the original article.

Written by Elizabeth Ecker

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  • Assuming that when it comes to reverse mortgages Jack is writing solely about HECMs, here is an interesting statement by Jack on the interest used in computing interest charged on the balance due: “For both standard and reverse mortgages, there is a maximum rate, 5% to 10% above the start rate, and often a minimum.” What minimum rate is there on adjustable rate mortgages? The minimum is normally the margin so unless the margin is not fixed or is 0%, there will always be a minimum rate, the margin rate.

    It was very odd how Jack addressed “The consequences of a rate change….” He correctly presents payment changes for forward mortgages when there is a change in the interest rate being charged; yet he totally ignores the impact to the interest being charged on forward mortgages but correctly states how accrued interest is impacted when the interest being charged is changed on a HECM. He does, however, make it clear that HECMs have no payment changes as a result of interest rate changes since HECMs have no periodic required payments.

    Here is a very wrong concept Jack presents about HECM to HECM refis: “The fixed-rate HECM does not allow the borrower to reserve any borrowing power for future use…. The only way the senior can draw more funds is to refinance the HECM into a new HECM, but for that to work, either the value of the home would have to rise appreciably, or regulations that cap draw amounts would have to be relaxed.”

    Jack does not seem to understand mandatory obligations and that a HECM payoff is a mandatory obligation so that there is no cap on draw amounts to pay off mandatory obligations and to the extent eligible and elected, the 10% of the initial principal limit additional payout as long as the initial principal limit is not exceeded at initial funding.

    Jack also tries to make a point of needing the value of the home to grow in order to refi a fixed rate HECM to another fixed rate HECM to get more proceeds but that may not be the case at all. If the initial draw on the existing HECM was based on 60% of the initial principal limit, the principal limit on the refi may be sufficiently high enough to meet the needs of the senior even if the value of the home has not gone up that much at all. Also if the maximum claim amount was at the current lending limit, then it would not matter how much the value of home rises since the principal limits would be the same on both HECMs if they are determined under the same Mortgagee Letter. If not, then one will have to evaluate all differences.

    Jack presents what he sees as the characteristics of a fixed rate HECM borrower in the following: “The fixed rate HECM reverse mortgage is primarily for seniors who plan to use all or most of their borrowing power right away. 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.” Really?

    Most fixed rate Standard borrowers I dealt with generally either wanted more proceeds than an adjustable rate HECM could yield at the time or the borrower did not want an adjustable rate loan. It was a little startling to read Jack writing that the intent of some of these borrowers is to “purchase a single-premium annuity.” Rarely have I dealt with a fixed rate borrower with the same objectives Jack describes.

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