There are two basic options, but there are a lot of things to consider.
The first thing to remember is that unlike a traditional forward mortgage, there are NO payments with a reverse mortgage, no matter which loan program you choose (and no matter the rate of interest).
The key difference between the fixed and the adjustable rate mortgage, other than the obvious, is what happens after the first year. On the adjustable, there are a LOT of options.
It’s simple: you can get a lump sum of cash (if available, depending on the loan calculations due to your age, value of the home, and how much you still owe on it) and the rate never changes.
Here’s an example of the proceeds, based upon a home with a value of $550,000 and an existing mortgage of $150,000:
In this example, the Private Mortgage Insurance is $13,750, the closing costs are $2,385, and the lump-sum cash at closing is $29,810.
There are two available types of adjustable rate mortgages; one adjusts annually and the other monthly. There are differences between them about how the rates adjust, but for the purposes of this discussion, focusing on the cash available, they function very much the same way.
All the magic with the adjustable happen after the first twelve months. For the first twelve months, the fixed and adjustables typically function very much the same way, presuming you wish to take as much cash at close as you can. After the first year, you can pull money from a line of credit, or set up a fixed monthly payment for a limited term or for the life of the loan, or you can do any creative combination of both.
Here’s example 1 using the same home scenario from above:
Note that the payoff, closing costs, and cash at closing are the same. Then you can see there’s a line of credit of $102,155 available AFTER 12 months. Furthermore, any unused portion of the line of credit increases monthly at a rate 0.104% above the note rate.
In this case, for example, if you didn’t TOUCH the line of credit for the entire second year, the line of credit would increase by $4,954 to $107,110. This continues throughout the life of the loan on any unused portion of the credit line.
Here’s a different example:
Again, it has the same payoff, closing costs, and cash at close as the above two. But rather than a line of credit, this loan will pay you a monthly payment of $674.13 per month for the life of the loan.
Here’s a last example, which is a hybrid of the previous two:
This example shows a monthly lifetime payment of $337.07 and a maximum line of credit available of $51,077.
Just like before, any unused line of credit increases its potential limit monthly by a factor of 0.104% above the note rate. Furthermore, this is just an example. If you wanted a guaranteed monthly payment, you have the option of setting it from anywhere between $10 and $674.13 per month. The bigger the monthly payment, the lower the line of credit limit.
All of these considerations, however, begin with (1) calculating the loan limits and (2) determining exactly what you’d like to accomplish. A good HECM loan officer can help make this process an easy one.
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