Advantages Of The Fixed Rate Reverse Mortgage Loan

If you have not yet, go back to read the Advantages Of The Variable Rate Reverse Mortgage Loan

The variable rate loan has one distinct disadvantage, the interest rate is variable over the life of the loan, but that is also the advantage as well. With the variable rate loan you have the choice of taking out a lump sum, opening a line of credit or receiving a fixed monthly payout for the rest of your life or any combination of these. With the fixed rate option the interest starts to accrue from the time you take out the loan, since it only comes as a lump sum option. On a variable rate loan, if you choose the fixed monthly payout or line of credit, the interest only accrues on the money that has been paid out to you. In the long run the interest accrues much more slowly. The variable rate reverse mortgage comes as the HECM Standard or HECM Saver.

For example, if you are 70 years old and the value of your home is $200,000 and you take out a fixed rate lump sum loan of $109,000, which is the max payout, your balance would be approximately $181,000 in 10 years. But if you were to take the fixed monthly payout option, your balance would be $110,000 in 10 years, roughly $71,000 less interest over the same period of time.

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Advantages Of The Variable Rate Reverse Mortgage Loan

When comparing the Reverse Mortgage fixed rate and variable rate loans, there are a lot of factors to consider what option will be the best for you financially. The fixed rate option has been very popular over the past few years, simply because the interest rate is fixed, but there are many disadvantages of taking an interest rate that is fixed with a reverse mortgage. The variable interest rate reverse mortgage loan has a disadvantage, which you might have guessed, it is an adjustable rate product and the loan's rate can be unpredictable. But there are many advantages to the variable rate reverse mortgage that you may want to consider when looking at the best option that fits your need.

The fixed rate loan has one distinct advantage, the interest rate is fixed over the life of the loan, but that is also the disadvantage as well. If you were to choose the fixed rate loan option, you must take a lump sum payout, there are no other options with the fixed interest rate loan. The only reason you would want to use this reverse mortgage product is if you are going to use all the cash at once or paying off the mortgage currently on your home. For example, if you take out a lump sum, but don't use all the cash at once, then you are just paying interest on money that is sitting in a bank account. Unless you use all of the cash upfront, then you may want to consider the variable rate loan because it is more flexible and offers many options. The fixed rate reverse mortgage only comes with the HECM Saver product. In April of 2013, HUD stopped allowing the HECM Standard with the lump sum option.

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Automated Communication In The Mortgage Industry

Modern technology has made communication easier than at any other point in human history.  Email, social media, mobile apps, these tools are amazing and many can even be automated.  So why is the mortgage industry so far behind in embracing and adopting these tools?  Title companies and Realtors have automated communication tools for their part of the process of purchasing a home, but there is typically no such system in place from the lender.

Good news, it looks like that is about to change.

This article from the National Mortgage News discusses automated communication programs with the very companies that are designing them.  They are drawing inspiration from other industries to put together the most thorough and secure platform possible.  With so much sensitive data in loan docs, this security is of the utmost importance.

So what will these look like?  I'm glad you asked. 

Mobile apps are beginning to be the preferred method of communication by the majority of consumers.  An app that sends you regular and intermittent updates on your loan, what docs are needed, what you need to sign, etc and also provide you access to your loan package on the fly are in the pipeline. 

While complex regulations have prevented such developments to this point, increased security measures are now available in other industries that can be used as a model.  The future is very exciting!

How A Reverse Mortgage Line Of Credit Works

If you are interested in how we got here, read this blog entry which is an intro to a Reverse Mortgage Line Of Credit.  And now let's get into how this works.

To illustrate the impact of this growth feature, consider an applicant that took out an adjustable reverse mortgage at 2.75 percent, and left the entire $300,000 in the Line of Credit.

Growth on a $300,000 Line of Credit, after monthly compounding, would be 2.75 percent +1.25 percent = 4.00 percent. The schedule below shows the power of the compounded growth at various times in the life of the loan. Untapped, the available equity would be as follows:

5 yrs. = $366,299
10 yrs. = $477,250
15 yrs. = $546,090
20 yrs. = $666,775
30 yrs. = $994,049

The equity line grows and is available for use by the borrower regardless of the current value of the home. This feature provides a valuable hedge against value fluctuations in our real estate market as well as economic downturns.

Lastly, any payments, such as interest or principal, on the reverse mortgage go dollar-for-dollar to increase the available Line of Credit. Therefore, borrowers who elect to pay some or all of their annual interest expense on the mortgage will see their LOC grow by the amount of the payment as well as reduce their outstanding loan balance by that same amount.

All in all the LOC option is a great feature that can help borrowers be more secure in their financial future.

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A Reverse Mortgage Line Of Credit Intro

The adjustable rate reverse mortgage (RM) has a line of credit option that may appeal to many potential borrowers. Instead of taking all the available cash out at closing as a lump sum, the borrower can leave the available funds with the lender in a Line of Credit (LOC) facility.
 
Borrowers do not need to complete a special application or jump through extra hoops to use the LOC option. The funds left in the LOC are insured by the FHA, so they are safe.

Furthermore, the reverse mortgage LOC has several features that are superior to traditional lines of credit from a bank or through a home equity line. The RM LOC is non-cancelable and non-freezable, and its terms cannot be changed. The line can be drawn upon and paid back unlimited times, without incurring a reduction or freeze in the amount of the credit. The funds in the LOC remain even if the property value declines or the borrower's credit rating erodes. These features offer a tremendous amount of security and financial flexibility as people live with investment ups and downs while needing to address financial needs that occur.

The RM LOC also has a growth feature that is highly attractive. Funds left in the LOC will grow at the same monthly compounded interest rate, which includes the 1.25% charged for FHA insurance, that the borrower is paying on the loan's principal balance outstanding.

Next week we will look at how this works.

Until then, be well.

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A Reverse Mortgage Calculation

Reverse loan calculators can provide a basic estimate of the amount of equity that a borrower can access. Here are two examples of A $200,000 home value at age 62 & age 75 documenting both HECM.

• $200,000 Value /62 Borrower age
• Fixed HECM"Standard" Max Loan $123.800
• 62% of Value
• Lien Payoff $25,000
• Loan Cost $9,500
• Funds Available = $89,300
• Fixed HECM "Saver" Max Loan $104,600
• 52% of Value
• Lien Payoff $25,000
• Loan Cost $5,500

• $200,000 Value / 75 Borrower age
• Fixed HECM"Standard" Max Loan $138,600
• 69% of Value
• Lien Payoff $25,000
• Loan Cost $9,500
• Funds Available = $104,100
• Fixed HECM "Saver" Max Loan $112,400
• 56% of Value
• Lien Payoff $25,000
• Loan Cost $5,500

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What Factors Are Considered For Loan-To-Value Of A Reverse Mortgage?

The answer varies for each individual and personal situation but begins with the age of the borrower more specifically the youngest borrower and the "lesser" of the FHA reverse mortgage loan limit ($625,500 in most areas) or the appraised value and the current interest rate. This starting point can provide an initial idea of what the borrower can qualify for and is referred to by HUD as the Principal Limit Formula which uses a table almost like an insurance mortality table to determine the principal limit.
 
Other factors that may play a role in the reverse loan amount include, whether there will be a payoff of an existing lien and the loan fees that are included within the loan. The loan program the borrower chooses such as the Home Equity Conversion Mortgage ( HECM) Standard or the (HECM) Saver. Each HECM offers different loan limits and fees. The HECM Saver provides lower loan limits but also lower Mortgage Insurance Fees making it an attractive option for those who have lower home values.

Borrowers who have outstanding payments due on their taxes or home owners insurance, judgments or liens against their property will also be required to pay these through the loan, additionally if the home is found to be in need of repairs that are referenced by the FHA appraiser these items will need to be repaired or replaced either in advance or with proceeds from the reverse mortgage and invoiced prior to closing.

Older Reverse Mortgage borrowers find that they qualify to access more of their reverse mortgage equity making the mid-70 age range one of the most optimal times to complete the reverse mortgage

• Affect HECM Home Equity Access
• Age of Borrower(s)
• Value of Home
• HECM Loan Program "Standard" or "Saver"

• Affect HECM Mortgage Net Proceeds
• Mortgage Lien Payoff
• Liens & Judgments
• Repairs- Required by FHA
• Loan Fee's

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