December 23, 2008
Reverse Mortgage – Why the Fixed Rate is Used Sparingly
The senior community is still getting its proverbial feet wet when it comes to the reverse mortgage. As such I spend the vast majority of my time educating them on the basic workings of the mortgage.
Conversation eventually makes its way to the mortgage options for them and more particularly the interest rate. The truth is that the ARM makes sense for most seniors.
Older Americans are more conservative. As such they have a hard time with this when I say, “you’re going to want the adjustable rate option”. To avoid them walking out of my office I explain myself quickly.
The reality is the fixed rate option is does not offer the flexibility of the ARM. Only the adjustable rate offers the borrower a line of credit option. The fixed rate, rather, forces the senior to take out money one time and one time only.
By allowing the choice of when to draw out money the adjustable offers the borrower an uncontestible advantage over the fixed in that interest accrues only on drawn out money. The rest is safely not accruing interest against the equity of the home.
This being the case there really is only one borrower that fits the profile for the fixed rate. It is the borrower who absolutely needs to take out a large lump sum immediately.
A good example is someone looking to pay off a mortgage to eliminate the monthly payment. Most fixed rate customers are in this boat, because there main goal is to free up monthly funds. They are not really interested in having a cushion of money at their disposal.
With this in mind it’s all personalities. Many will still grab that ARM but the more risk averse borrower will gravitate to the fixed. Keep in mind the fixed rate today is only slightly higher than the fifteen year average for the adjustable.
Filed under Finance by