Let’s face it. Reverse mortgages are inherently complex. At least when they were first introduced, the number of lenders and the range of available products were both relatively small, such that once the decision to borrow using a reverse mortgage was made, there wasn’t much left to decide.  Over the last few years, however, the surge in reverse mortgage lending has been accompanied by a commensurate surge in innovation. As a result, the process for obtaining a reverse mortgage is now a whole lot more complicated.

Unlike conventional mortgage rates, which are correlated with credit-worthiness, reverse mortgage rates are correlated with the quality of your home. This is because with a reverse mortgage, there’s very little default risk. There is only a risk that your home will decline in value, to the extent that it will be worth less than the balance of the reverse mortgage.

With a so-called plain vanilla reverse mortgage, the interest rate is fixed for the duration of the loan, just like with a conventional mortgage. The only difference is that the balance on a conventional mortgage (and consequently, the interest) will decline to zero, whereas the balance on a reverse mortgage will continue growing until the mortgage is repaid (i.e. the borrower passes and/or the home is sold).

With a variable rate reverse mortgage, the interest rate can fluctuate from month to month (or year to –year) depending on changes in benchmark interest rates. Unfortunately, variable rate reverse mortgages are not as comparable to variable rate conventional mortgages, which make them difficult to conceptualize. That’s because variable rate conventional mortgages are usually obtained with the intention of refinancing when rates get too high, and enable borrowers to automatically convert the variable rate to a fixed rate after a certain period of time. Reverse mortgages on the other hand, while theoretically can be refinanced, or rarely done so in practice, because of high upfront costs. In addition, while the FHA caps the maximum rate hike to 10%, this doesn’t really provide much in the way of security.

So how do you know which type is right for you? Like their cousins over on the conventional mortgage side, fixed rate reverse mortgages are safer, more transparent, and conducive to financial planning. Since there is no risk that the interest rate will fluctuate, your lender will be able to tell you on Day 1 how much is available to you under the loan. With a variable rate reverse mortgage, you will probably be limited in your ability to withdraw funds, especially if you want to receive the loan in the form of a lump-sum payment. This is because the bank must guard against sudden interest rate hikes, which could lead to an underwater mortgage. On the other hand, for those relying on a reverse mortgage for temporary financial needs, a variable rate mortgage could lead to significant savings in a low interest rate environment. Just make sure you understand that your equity will be eroded faster when rates rise, and that the funds available to you will be smaller than if you had opted for the fixed-rate version.

As with a conventional mortgage, you should shop around for the best rates. There probably won’t be too much disparity between rates quoted by the most reputable lenders, since their costs are standardized and all loans are ultimately underwritten by the government, via the Federal Housing Administration. Still, it doesn’t hurt to compare rates, especially if you have been solicited by a lesser-known lender, which could potentially take advantage of the relative obscurity of reverse mortgages by insisting on a higher interest rate.

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