If you’re considering a reverse mortgage to supplement your income in retirement, many financial experts say that you may be making a very smart decision. A reverse mortgage, otherwise known as a home equity conversion mortgage (HECM), enables you to pull out money from the equity of the house you live in without having to sell it. There are two distinct types of HECMs, including those with fixed rates and adjustable (variable) rates. Here’s what to know about fixed and adjustable reverse mortgage rates.
How Does a Reverse Mortgage Work?
A HECM operates like a typical mortgage except that you don’t have to make payments or pay interest. Instead, you can pull money out of your equity. That money plus the interest is added to the balance of your loan. When you pass away or move, the loan must be paid in full. This is accomplished through selling the home to pay off the debt or transferring ownership to the bank. Alternately, an heir may keep the home if they continue to pay off the loan.
As the homeowner, you can take the equity out in monthly payments, as a line of credit, or in a lump sum. None of the options are taxable, as the payments are categorized as a loan, not income by the IRS. When you move or pass away, capital gains taxes must be paid on any difference between the purchase price and the sales price.
Fixed Reverse Mortgage Rates
If you opt for a fixed-rate HECM, you can expect the interest on the loan to remain fixed for the duration of your loan. A fixed-rate loan may only be available if you choose to receive a lump-sum payment. Fixed reverse mortgage rates are determined by the lenders, using current economic conditions and other factors to set the rates. You’ll need to get assistance from a trusted mortgage advisor to learn what the current rates are when you inquire about a HECM. Rates can change daily, so you’ll get the most current rates at your time of inquiry.
If you’re interested in a reverse mortgage that provides you with monthly payments, you may prefer to apply for an adjustable-rate loan. This means that the interest rate can fluctuate in accordance with current economic conditions. However, there are rate floors and rate caps to prevent exceedingly low or excessively high-interest rates for your loan.
Other Costs Associated with HECM Loans
It is important to know about other costs or fees that may be tacked on to your HECM. Although these won’t affect your reverse mortgage rates, they can add up. According to HUD, the fees and charges will include:
- Third-party charges, which can include appraisals, inspections, credit checks, title and insurance, and other fees.
- Servicing fees, which are the cost to have your loan maintained by the lender.
- A mortgage insurance premium, which is a 2% fee you’ll pay at closing for mortgage insurance from the Federal Housing Administration (FHA).
- Origination fee from your mortgage advisor for processing your new mortgage.
Learn More About Reverse Mortgages in Oregon
Strategic Mortgage Solutions serves the real estate lending and financing needs of Oregonians. Whether you’re a first-time homebuyer, a homeowner needing to renovate a new home, or a retiree looking to supplement your income with a reverse mortgage, our team is here to help.
Send us a message, or call 541-275-1148, to connect with a top Oregon mortgage advisor today.