Last year, I offered a primer on Selecting a Reverse Mortgage Interest Rate. I want to update that post below, in accordance with the unveiling of the new HECM Saver, which differs from the existing HECM Standard in that it waives the upfront Insurance Premium in exchanging for lending smaller amounts to reverse mortgage borrowers.

The basic difference between fixed rates and variable rates is that the former stay the same throughout the life of the reverse mortgage, while the latter fluctuate. In a nutshell, the advantage of choosing a fixed rate is that it is stable and predictable, while a variable rate might offer the possibility of either short-term or long-term savings. As fixed rates are presently much higher than variable rates, you can think of a fixed-rate as a kind of security premium that you pay for not having to worry about rising interest rates.

It’s important to be aware that with a fixed-rate reverse mortgage, you will probably be required to receive the entire loan as an upfront payout. (That’s not to say that you can’t select a variable rate and an upfront payout). If you are determined to receive a line of credit or tenure/term monthly payments, you must accept a variable interest rate and the accompanying uncertainty.

As of November 2010, a fixed-rate HECM Standard can be obtained for 4.99%, while an HECM Saver can be obtained for 5.25%. (While conventional mortgage fixed-rates are slightly lower, a rate floor is dictated the FHA). Variable rates follow the same relationship; lenders might use the same benchmark interest rate (1-month LIBOR or a short-term Treasury rate), but will typically add a greater margin onto HECM Saver loans. Currently, an HECM Standard carries a variable rate of 2.5%, while an HECM Saver will carry a variable rate closer to 3%.

Regardless of whether you choose a fixed-rate or variable rate, any savings from not having to pay an upfront insurance premium (with the HECM Saver) might be offset by a higher interest rate. To make matter even more confusing, unused funds (if you select the line-of-credit payout option) will pay you interest at a higher rate with an HECM Saver, compared to an HECM Standard.

In short, choosing between a Saver and a Standard depends on how you withdraw the proceeds of the reverse mortgage and the planned duration of your reverse mortgage. The same is largely true when comparing fixed rates and variable rates. If you have a short time horizon, you will probably save money with a variable-rate HECM Saver. Since interest rates will probably rise within the next five years, however, those that plan to maintain the reverse mortgage indefinitely will probably come out ahead with a fixed-rate HECM Standard.

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