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Reverse Mortgage Interest Rates

For homeonwers who are 62 years of age or older, a reverse mortgage may be a great option for tapping into equity and generating much-needed income. However, the fees and interest rates associated with reverse mortgages are usually a major concern for older homeowners, especially since so many are already on a fixed income. While reverse mortgage interest rates are typically higher and fees can be costly, the good news is that both of these costs can be financed into the reverse mortgage loan itself. That means no money spent out of pocket.

Unlike conventional “forward” mortgage loans, in which homeowners are required to make monthly payments to the lender, a reverse mortgage works in the opposite way: the lender makes payments to the homeowner. In most cases, this money does not affect Social Security benefits, Medicare eligibility, and is generally not taxable. However, the loan amount does need to be repaid once the borrower no longer lives in the home, whether due to relocation or death.

What are typical interest rates on a reverse mortgage?

Because interest rates change so frequently, it is difficult to pinpoint an exact range that reverse mortgage rates will fall into. However, the rates associated with reverse mortgages are typically higher than those you might get with other, more traditional forward home loan programs.

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Are reverse mortgage rates fixed?

Although some reverse mortgages will have fixed interest rates, many of them will have a variable rate, which is tied to a financial index. These variable rates are likely to move up or down, based on the changes in the market’s condition.

Paying interest on a reverse mortgage

Unlike traditional conventional mortgages, in which the amount you owe decreases over time, in a reverse mortgage the amount owed actually increases (presuming no payments are made back to the lender until the loan is called due). As the reverse mortgage balance grows, interest is charged on the outstanding balance and added to amount you owe each month – in other words, you will essentially be paying interest on top of interest in a reverse mortgage. This is why reverse mortgages are sometimes considered a more expensive planning strategy. However, for certain types of borrowers, a reverse mortgage can be worth the expense in order to achieve more financial freedom and the ability to tap into equity for a variety of reasons. Whether you are eliminating other debts, supplementing your retirement income, or paying for healthcare expenses, the proceeds from a reverse mortgage can be a great way to satisfy your immediate financial needs.

Are there cheaper reverse mortgage options?

There are three types of reverse mortgages: Single-purpose reverse mortgages, which are offered by some state and local government agencies or nonprofits; federally-insured reverse mortgages (also known as Home Equity Conversion Mortgages or HECMs) which are backed by the U.S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans backed by the companies that develop them.

With single-purpose reverse mortgages, borrowers can only use the proceeds for one purpose. That purpose is specified by the government or nonprofit lender. For example, the lender may say that the borrower can only use the proceeds for home improvement/repair projects. Single-purpose reverse mortgages are generally considered the least expensive option out of all reverse mortgage products; however, they are more limited in what they allow the borrower to spend the proceeds on and they are not as commonly available as proprietary and HECM reverse mortgages. Furthermore, there may be income limits on single-purpose reverse mortgages that can make some homeowners ineligible.

HECMs and proprietary reverse mortgages may be more expensive, with higher fees and closing costs. However, these types of reverse mortgages are much easier to find, have no income or medical requirements, and the proceeds from them can be used for anything.

For more information on the interest rates and fees associated with reverse mortgages, contact a qualified lender serving your area. You may also want to speak with a licensed financial counselor and consider all of your options before committing to a reverse mortgage.

Related topics:
Reverse Mortgage Interest and How it Works
Reverse Mortgage Fees

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Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.