Adjustable vs Fixed - ARM Wins in Reverse Mortgage World
A few days ago I received a call from a man looking for a reverse mortgage. After spend a bit of time reviewing his situation I came to obvious conclusion that he should get 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.
Well, this fellow beat me to the punch, which is hard to do when there might have be a millisecond for him to cut me off. When I attempted to explain why he simple grunted gruffly, "FIXED RATE".
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.
Quite simply, the fixed rate does not have a line of credit option and the ARM does.
A borrower will qualify to get a certain amount of money based upon multiple criteria. Most don't need all of it at the time they close on the reverse mortgage. That makes the ARM appealing.
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.
This benefits the borrower's equity. Unused money in the line of credit has no negative affects on the borrower's equity. It's not accruing interesting eating away at the precious 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 math is all wrong. The interest rate today on the fixed is greater than the return he'd get from a bank, CD and certainly the stock market at this point. The choice for most is the ARM. Work the numbers and discover why.
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.
Well, this fellow beat me to the punch, which is hard to do when there might have be a millisecond for him to cut me off. When I attempted to explain why he simple grunted gruffly, "FIXED RATE".
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.
Quite simply, the fixed rate does not have a line of credit option and the ARM does.
A borrower will qualify to get a certain amount of money based upon multiple criteria. Most don't need all of it at the time they close on the reverse mortgage. That makes the ARM appealing.
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.
This benefits the borrower's equity. Unused money in the line of credit has no negative affects on the borrower's equity. It's not accruing interesting eating away at the precious 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 math is all wrong. The interest rate today on the fixed is greater than the return he'd get from a bank, CD and certainly the stock market at this point. The choice for most is the ARM. Work the numbers and discover why.
About the Author:
To get California Reverse Mortgage myths, pitfalls and mistakes make it to this site. A tremendous question and answer spot for the California reverse mortgage is at this little fella.
posted by Credit Counseling at
2:32 PM
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