This week something unprecedented happened: the fixed-rate HECM reverse mortgage provided more cash available to borrowers than the variable rate programs.
According to this reverse mortgage calculator, a 70-year old homeowner with a $200,000 home would be able to draw $124,151 from a fixed-rate HECM (at 5.56%) versus $123,503 with the lowest margin variable rate (HECM 175 at 2.44%).
This odd outcome where a higher rate provides more than a lower rate is due to two features of the FHA HECM formula:
- When the rate gets down to 5.5%, a lower rate does not increase the available lending limit percentage (there is a floor)
- A higher interest rate reduces the servicing fee set-aside so even though all the programs are providing the same principle limit, the available principle limit is higher with the fixed rate.