Pay off an existing mortgage: A reverse mortgage can pay off and replace a traditional mortgage loan, reducing the burden of a mandatory monthly payment and resulting in immediate savings — especially helpful in today’s uncertain times.
Standby line of credit: Unlike traditional credit lines, reverse mortgage credit lines are federally insured and cannot be frozen or called due. The unused portion has a guaranteed growth rate of .5% over the current interest rate on the loan, allowing more funds to be borrowed over time. Even if the home decreases in value, the line of credit remains and continues to grow.
This offers an excellent insurance policy against market fluctuation, and a tax-free source of money that can be used as a buffer in a down market.
The strategy in turbulent times would be to draw funds from the credit line instead of drawing on other assets (such as selling stocks when they’re down). Thus, a reverse mortgage credit line can limit the need to make portfolio withdrawals, protecting and preserving retirement accounts.
Multiple payout options: Reverse mortgage proceeds may be accessed in a lump sum, in the form of an annuity (a lifetime payout known as “tenure”), through equal payments over a fixed period of time (known as “term”), or through a combination of these options.
While reverse mortgages can be based on fixed interest rates, the line of credit, tenure and term payouts are available only on adjustable interest rate options.
Interest rates on reverse mortgages are on par with traditional mortgage interest rates. Rates are negotiable and vary from lender to lender.
The “index rate” is the standard rate that varies depending on market interest rates. It is not controlled by the lender. The rate charged on your loan can increase or decrease depending on whether the index increases or decreases.
The margin rate is the interest percentage that is added to the index by the lender. This rate is not adjustable, meaning that after loan origination, the margin stays the same throughout the loan term, regardless of what the index may change to. It is also negotiable.