Fixed or Adjustable?

Recently I took a loan application for a client who decided she wanted a fixed rate Reverse Mortgage and she was non-negotiable.

I knew a fixed rate was not a good choice for her, so I printed out amortization schedules for both a HECM adjustable and the fixed rate. And I showed her why a fixed rate was a really poor choice in her case.

Why? Well, simple. The provisions of a fixed rate require that the borrower take out ALL the funds at closing. That means that from day one, they are paying interest on the entire loan amount, vs. paying interest only on financed closing costs and any draws on a HECM adjustable.

Here’s the facts:

If she were to take an adjustable with the loan amount she was eligible for (171,720), she would still have equity in her home 32 years later.

However, if she chose a fixed rate, because of the requirement to draw the entire amount at closing, she would be out of equity in 15 years!

And since she was in her early seventies, that would mean that by her mid-eighties, she would have no equity left.

And those figures are based on the assumption of an annual appreciation rate of 4.7% which in this market is not supportable. It may be historically, but it isn’t right now.

So when considering your options compare Apples and Apples – and look at the progression of your loan over time on the adjustable vs. the fixed!

For more information, contact Montana at 561 860 3860.