Reverse Mortgage, Which one is right for you?

Reverse Mortgage Loans- Which one is right for you?

Tough times call for smarter action to survive. No doubt, economic recession has shaken the pillars of financial stability. Though people of all age groups are facing the heat of this devastating slow down, the worst sufferers are the senior citizens with their limited pension and savings are finding it hard to maintain regularity in debt repayment. They are also facing in maintaining a balanced monthly budget. To help senior citizens in this regard, reverse mortgage loans are provided by both government and private financial agencies. In this article we will discuss about these loan plans in detail.

There are 5 types of reverse mortgages. I will explain them here:

1. The Simple Hecm:

This is one of the most popular reverse mortgage products on the market. It is what is considered a monthly adjustable rate. Every month the rate on the simple hecm can go up or down based on the financial index that it is tied to plus the banks profit margin. This reverse mortgage is tied to a financial market called the 1 month libor index which at this time is only .25%.  One insider secret is that banks actually get paid more money by giving you a higher margin. The base margin on this product is 2.75%. We have the ability to charge you a margin as high as 3.75% which would make us more money. I tell you this as a insight into how this product works. Our company will never charge you a margin higher than 2.75% on this product. So, to recap this to calculate your interest rate on this product you take the index + the margin. So on this product, it is a final interest rate of 3.0%. This low rate sounds great, but it can increase as the libor index does increase. The bank knows that the index will increase, so they have and internal calculation that they use to figure out the highest loan amount that they will give you on this product. You are probably asking yourself, Why is this product so popular? Well, it’s simple. This product will give you a line of credit which you can tap into at any time and you only pay interest on the money that you take out of this line of credit. Any money that you keep in your line of credit earns interest at 4.0%.

2. Monthly Adjustable Treasury Hecm

This program is identical to the simple hecm except it is tied to a different financial index. The index that this is tied to is the one month treasury index. Treasury’s historically have lower rates, so the banks have higher margins on this product. The base margin on this product is 3.25% and they will allow us to charge as high as a 4.25% margin. At this point in history, the treasury index is actually higher than the Libor Index. That would mean that if you chose this product, it would give you a lower principal limit than the simple hecm.

3. Hecm Fixed (closed end)

This product is relatively new. It offers a fixed rate which can not go up or down like the other 2 programs. The base rate on this product is at 5.56% and can go as high as 7.0%. Because of the low base rate, it offers a higher principal limit than any other reverse mortgage product.  The problem with this product is that it is a GNMA product. What that means is that the banks offer pools of these loans to investors on the secondary market. If one of the  investors do not like just one of the loan files, then they will choose not to purchase the entire pool of  loans and the bank is stuck with the loan on their books. Because of this, banks are very cautious about approving loans under this program. They will scrutinize the appraisal. The appraiser must have used comparable sales which are no more than 1.5 miles apart from each other to qualify for this product. In this housing market, those are few and far between. The other downside of this product is that the bank requires you to withdraw all of your loan proceeds at once as a lump sump. There is no opportunity for future interest earnings.

4. Hecm Fixed-Open End

In my opinion, this is the worse reverse mortgage product available. The base interest rate on this is at 14.0% and offers the lowest principal benefit to you. STAY AWAY FROM THIS PRODUCT!

5. Annual Adjustable Treasury Hecm

This is also an adjustable rate reverse mortgage. It has a higher margin than any of the other adjustables at 4.0%. This product is also tied to the treasury index. This product offers the lowest principal benefit to you among the adjustables. I would stay away from this product as well.