The Impact of Interest Rates on Reverse Mortgages
When seniors are having trouble managing their bills and paying for the upkeep on their homes, they have two choices. They can sell the home and move or they can get a reverse mortgage that allows them to stay in the house they love while also tapping into its equity and completing necessary repairs.
While a reverse mortgage might seem like a perfect solution, you still need to understand the basics of reversed mortgages and how reverse mortgage interest rates work before determining whether it’s the right solution for you.
Reverse Mortgage Interest Rates
When you take out a reverse mortgage, you don’t make payments on the loan. Instead, the principal and accrued interest are paid back when the borrower passes away and/or the home is sold. This can mean there will be little or nothing left, in terms of home value, for heirs. That can be a big consideration for many people. But if you’re careful you may still be able to leave them some value. You see, while you may not be paying monthly mortgage payments on the loan, it’s still important to secure a low interest rate so that there might be something left for your heirs after the loan is paid off.
Interest rates vary for reversed mortgages based on several factors, including the current prime rate and whether you choose a fixed or variable loan. A fixed loan may have higher initial rates, depending on the prime rate environment, but it will stay predictable and shelter you from risk if the fed rates rises during the term of your reverse mortgage. On the other hand, variable rate loans have a chance at having a lower overall charge. Your lender can talk to you about the different scenarios and work out expected interest charges over the life of the loan so you can properly evaluate both choices.
In factoring your interest, it’s also important to remember that the amount of the loan you receive through your reverse mortgage isn’t just dependent on age. It’s also going to depend on how high the interest rate is and how much your home’s assessed value is. So the lower the interest rate you can get, the more you’ll get from the loan.
Interest Isn’t the Only Fee
Reversed mortgages do have other fees besides interest, and you need to consider these as well when evaluating your loan options. First, there may be penalities when you decide to prepay the reverse mortgage, since that means the lender won’t earn as much interest as they expected. many lenders, however, offer penalty-free prepayment so you may want to consider one of them. In addition, there may be upfront costs for closing fees, insurance, and servicing fees for various accounting and bookkeeping tasks completed throughout the life of the loan.
A reverse mortgage also won’t solve all your financial problems if you struggle to keep up with monthly home and flood insurance costs and/or property taxes, which will all still be your responsibility to pay after you secure the loan.