If you are a homeowner age 62 or older and have equity in your home, you may be considering a reverse mortgage as a way to boost your retirement income, pay off some bills or to simply provide the peace of mind of knowing you have access to a line of credit.
The amount you can borrow from a reverse mortgage is based on a sliding scale according to your age and the value of your home. While the loan doesn't need to be repaid until you sell your property, move out or pass away, you should be concerned about the interest rate charged on the loan because the interest will be added to the principal balance along with any fees. The less you pay in interest, the lower the repayment amount. The interest rate will also impact how much you can borrow from your home equity.
Reverse mortgage interest rates: fixed or flexible?
The majority of reverse mortgage loans today are called Home Equity Conversion Mortgages (HECM) and they are insured by the Federal Housing Administration ( FHA). According to the Department of Housing and Urban Development (HUD), who oversees the FHA, reverse mortgage borrowers may choose a loan with an adjustable interest rate or a fixed interest rate.
While many seniors prefer the security of a fixed-rate loan, those who prefer an adjustable-rate loan have the option of mortgage rates that adjust monthly or annually. The FHA does not require any limits on the rate changes of reverse mortgage loans that adjust monthly.
Adjustable-rate loans that are reset on an annual basis are limited to adjust by no more than two percentage points per year and by not more than five percentage points over the life of the loan. In other words, if you start with a mortgage rate of 5 percent, your interest rate can never go above 10 percent.
Every reverse mortgage borrower must meet with a HUD-approved reverse mortgage counselor who can explain in detail the pros and cons of a fixed-rate or adjustable-rate loan.
Michele Lerner contributed to this answer.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.