Variable Rates - Reverse Mortgages in PA

While many homeowners enjoy the flexibility of withdrawing funds as needed from the proceeds of a reverse mortgage, it is important to understand the good and the "other" associated with this option. First, it is important to understand that under this option, the rate at which interest accrues each month will grow depending on a variable rate. This rate is made up of two numbers. As of today, the lender will have a margin they add to an index number such as the monthly LIBOR. A typical start rate today (including FHAs Mortgage insurance percentage) can be between 3.75% and 4.5%.

Here is what you need to be aware of when you obtain a monthly variable reverse mortgage (which would be used if you obtained a Line of Credit option).

1. The rate cap, meaning the maximum that the interest rate can go up to, can typically get as high as 10% above the start rate. This means that if your rate to start was 3.75%, it can get as high as 13.75%.
2. These rates can move quickly as they adjust monthly. Most people are used to conventional mortgages which historically have adjusted only yearly.

Now, there are things which are great about this particular option as well.

1. Most beneficial to this particular option is the fact that interest will only accrue on the funds which you have used thus far. The remaining/unused principal balance will not accrue interest.
2. A second great feature of the variable rate is that the unused portion of the credit line will grow over time. The current rate of this growth (as of Aug 2009) is 4.1%. This means that is you obtained a reverse mortgage and have a $100,000 credit line available and you do not use it for an entire year, next year you will have $104,100 available. This is a great feature because as time goes on it allows you to make the most of your reverse proceeds and should also track closely with home value appreciation.

In closing, it is important to consider one last item: Total Principal Limit. Without using too much industry jargon, it is generally always the case that the fixed rate reverse mortgage will offer a much larger initial principal limit - that is, the amount of cash which can be taken out of the home. It must not be forgotten however that a line of credit will grow over time and thus the total benefit after all funds are exhausted on a variable rate could end up being significantly higher depending on the time between the loan being taken and the complete use of the funds.

In my next post I will put together some examples of how a line of credit reverse mortgage can allow a user to maintain a strong equity position in their home, but also allow for yearly or monthly distributions from the equity....a match made in heaven!