Interest is the cost you pay on a loan. Mortgages have been available with fixed rates or adjustable rates for a number of years. Fixed rates carry the same interest rate for the life of the loan. The interest rate can change with an adjustable rate mortgage based on what happens in the financial markets.
Fixed rates are often thought of as the more conservative option because they eliminate the risk of higher monthly payments if interest rates rise. Rates have been falling since about 1981, however, and many people believe that they will eventually reverse course and rise for several decades.
Many of these people have believed that for at least ten years now and rates are still near record lows. Many home owners have benefitted from low payments over that time with adjustable rate mortgages.
Since no monthly payments are required on a reverse mortgage, the risks associated with higher payments should not be a large concern.
Adjustable rate mortgages are also considered riskier because they are the loans that have been blamed as a cause of the financial crisis that led to declines in home prices of 30 percent or more in many parts of the country. Qualifying standards for these loans were lower when real estate prices were rising and many home owners used adjustable rate mortgages to buy larger homes than they could afford.
Initial rates on many of these loans were below the market rate, but when the introductory rate expired, some home owners were unable to meet the higher payments.
Reverse mortgages do not have any underwriting standards related to income, so there is no difference in the riskiness of the borrower for these products. The maximum amount of a reverse mortgage is determined solely by the value of the property and the age of the borrowers.
How you take your money could impact whether you qualify for a fixed rate reverse mortgage or not. Only lump-sum reverse mortgages qualify for fixed rate loans, although these loans are also available at adjustable rates. If you take an equity line of credit under a reverse mortgage, you will be using an adjustable rate product.
Adjustable rates are low, and the Federal Reserve has promised to keep short-term interest rates low through at least late 2014. After that, if rates rise, they are likely to move relatively slowly as they have in the past. Adjustable rate reverse mortgages could be the best choice for if you want flexibility in how you access the equity in your home.