How Reverse Mortgage Borrowers Receive Their Money
The maximum disbursement or “initial disbursement limit” allowed at closing cannot exceed the greater of 60% of the Principal Limit/Maximum Loan Amount or the sum of mandatory obligations (i.e., closing costs, loan and judgment payoffs, set asides, etc.) plus 10% of the Principal Limit/Maximum Loan Amount.
Adjustable Rate Program
The remainder of the funds after the 60% available in the 1st year become available after 12 months.
- Monthly payments or draws
- Tenure plan: receive monthly funds for as long as one lives in their home and abides by the terms of the loan, such as paying property taxes and homeowners’ insurance.
- Term payment or draw: for a certain period of time; i.e., 15 years
- Fixed amount each month; i.e., $100 each month or $800 each month, whatever is chosen
The loan balance is increased at the time the borrower receives the funds, essentially taking small loans every time funds are received.
- A line of credit
- Money in your line of credit can grow, so more money could be available to the borrower in the future. Often confused as an interest rate, it is actually a growth rate. Growth rate means more funds are available for use at a future date. If one has not accessed the money in the line of credit, it is not their funds so interest is not earned. The growth rate is on available funds in the line of credit only.
The loan balance is increased at the time the borrower accesses funds in the line of credit. If one has not accessed the funds in the line of credit, they are not part of the loan balance to be repaid.
- A lump sum
- Or a combination of the above
All these options are subject to HUD program limits, i.e., cannot exceed 60% in the 1st 12 months.
One can make repayments which reduce the loan balance and then have the option to re-borrow those funds again via monthly draws or the line of credit.
Payment or draw plans, i.e., from line of credit to monthly draws, may be changed during the term of the loan for a small one-time fee that will be charged and added to the loan balance at the time of each change.
Fixed Rate Program
The HECM Fixed Rate allows only one draw to be done at the time of closing up to the initial 60% of the Principal Limit or the sum of mandatory obligations plus 10% of the Principal Limit.
- When Considering a fixed rate, consider:
- Interest rate is often higher initially than with the adjustable rate programs
- Interest is being accrued on all funds drawn up front
- Funds are NOT available in a line of credit or for monthly draws
- Do you need all the funds up-front
- One may choose to make a payment on the fixed rate option which will reduce the loan balance. However, these funds are not available to re-borrow again in the future.
NOTE: While a fixed rate reverse mortgage sounds enticing, once it is understood, it may not be the best choice for a reverse mortgage unless you need all the proceeds at time of closing. Even if you do need all the funds up front, consider if you will be making any prepayments during the term of the loan. There isn’t the same flexibility with the fixed rate as there is with the adjustable rate.
With that said, if one wants a fixed rate and doesn’t want to “leave money on the table” due to the cap they could choose to do a Life Expectancy Set-Aside (LESA) to pay property taxes and insurances in the future, similar to an escrow on a conventional mortgage.
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