Reverse Mortgage Fixed Rate Lacking Punch
A prospective client called me a few days ago. We discussed his situation for fifteen minutes and I told him flat out the best option for him was an adjustable rate mortgage.
Now, I know the senior community's take on adjustable rate mortgages, so typically, when I come out and say, "an ARM is the right choice for you", I don't wait for a response. I simply go into my reasoning as soon as possible.
Many seniors have built up opinions which may be hard to shake. When one makes a grand statement, that might normally be seen as negative, one better quickly put some logic behind it.
The gentleman on the other end of the phone was having none of it and there wasn't a split second that went by before he put the kibosh on my explanation. He wanted a fixed rate and that was that.
Now I'm not exactly the kind of person willing to accept being squelched. I have a voice, my words make sense, and I was going to tell him where the bear makes in the buckwheat. Wrong! He shut me up again.
My would be customer refused to hear what I had to say, as if I was introducing a vampire into his home. Since you can't shut me up, perhaps you can read on and get a feel why the ARM is typically the better choice.
The reason is the adjustable rate mortgage is available as a line of credit. The fixed does not have this option.
Lenders qualify the senior to receive an available sum of cash equal to 50% to 75% of the home's value. Most only need a portion of this money. This makes the ARM and line of credit more viable.
The line of credit option gives the senior the right to draw out cash, use as needed, and leave the rest for later. At any time they can draw out more money.
What is most notable about this is the interest accrues against the borrower's equity only on money drawn out and used. While it's sitting in the line of credit it's not working against the borrower's equity.
Unlike the ARM, the fixed rate option allows only one draw of funds. So, the borrower better make it count. And interest starts accruing immediately on the entire sum.
If Mr. Fixed Rate above owned the home free and clear and was getting the reverse mortgage to supplement income, it would be silly to get a fixed rate mortgage. To do so means the borrower would have to pull out a large sum and plop it into a bank or CD awaiting its use.
The problem is his interest rate on the fixed rate would eat into his equity faster than the money in a bank or some other investment would grow (at least the investment I see today). The ARM in this case, ironically, is the better more conservative choice.
Now, I know the senior community's take on adjustable rate mortgages, so typically, when I come out and say, "an ARM is the right choice for you", I don't wait for a response. I simply go into my reasoning as soon as possible.
Many seniors have built up opinions which may be hard to shake. When one makes a grand statement, that might normally be seen as negative, one better quickly put some logic behind it.
The gentleman on the other end of the phone was having none of it and there wasn't a split second that went by before he put the kibosh on my explanation. He wanted a fixed rate and that was that.
Now I'm not exactly the kind of person willing to accept being squelched. I have a voice, my words make sense, and I was going to tell him where the bear makes in the buckwheat. Wrong! He shut me up again.
My would be customer refused to hear what I had to say, as if I was introducing a vampire into his home. Since you can't shut me up, perhaps you can read on and get a feel why the ARM is typically the better choice.
The reason is the adjustable rate mortgage is available as a line of credit. The fixed does not have this option.
Lenders qualify the senior to receive an available sum of cash equal to 50% to 75% of the home's value. Most only need a portion of this money. This makes the ARM and line of credit more viable.
The line of credit option gives the senior the right to draw out cash, use as needed, and leave the rest for later. At any time they can draw out more money.
What is most notable about this is the interest accrues against the borrower's equity only on money drawn out and used. While it's sitting in the line of credit it's not working against the borrower's equity.
Unlike the ARM, the fixed rate option allows only one draw of funds. So, the borrower better make it count. And interest starts accruing immediately on the entire sum.
If Mr. Fixed Rate above owned the home free and clear and was getting the reverse mortgage to supplement income, it would be silly to get a fixed rate mortgage. To do so means the borrower would have to pull out a large sum and plop it into a bank or CD awaiting its use.
The problem is his interest rate on the fixed rate would eat into his equity faster than the money in a bank or some other investment would grow (at least the investment I see today). The ARM in this case, ironically, is the better more conservative choice.
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posted by Credit Counseling at
3:10 PM
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