A senior gentleman gave me a call yesterday. For 15 minutes I assessed his situation and told him definitively he should move forward only with an adjustable rate mortgage.
I’ve spent enough time around the old block to know that If I’m going to say something to a senior like, “you need an adjustable rate mortgage” I better explain myself in no uncertain terms…. And post haste.
The adjustable already isn’t in good standing with the general public. With a conservative group like seniors it’s even worse. I better start making sense and quick-like.
I lost the race. This guy was like Speedy Gonzalez. He immediately held up the proverbial stop sign and made it clear, in no uncertain terms, he wanted the fixed rate.
I know when I’m right. This guy was letting his own rather uninformed opinions get in the way of logic. Without a doubt he could save thousands if not tens of thousands of dollars by listening to me. Not happening.
Well, he was set in his ways and never did open his mind to logic, but maybe you will. The adjustable rate, as it pertains to reverse mortgages, is typically the way to go.
Quite simply, the fixed rate does not have a line of credit option and the ARM does.
Borrowers qualify to receive a certain amount of money. Most do not need to use all of it. Some hardly need any up front, which makes the line of credit an important option.
The ARM allows the borrower to pull out needed moneys and leave the remainder as a line of credit. The borrower can draw from the line of credit at the borrower’s leisure.
What is most notable about this is the interest accrues against the borrower’s equity only on money drawn out and used. While it’s sitting in the line of credit it’s not working against the borrower’s 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.
Let’s say my guy above, who wouldn’t listen to me, owned his home free and clear (which he did). He also wanted to supplement his income. His is the most obvious example of someone who should go with an ARM. Going with a fixed would force the borrower to draw out a big sum and put it into some other investment while waiting to use it.
It does not compute. The rate charged for money pulled out would be greater than the return from the bank or CD. The best option is to go with the ARM and leave it the line of credit. On top of that the 15 year average interest rate on the ARM is lower than the current fixed rate.