Fixed vs. Adjustable-Rate HECMs: How to Pick the Right Reverse Mortgage

If you’re considering a home equity conversion mortgage (HECM), you’ll have to choose between fixed and adjustable interest rates. The rate structure you choose directly affects your payout options, long-term costs, and your flexibility over time. Understanding how each loan works can help you decide which option supports your long-term financial goals.

What is a fixed-rate HECM?

A fixed-rate reverse mortgage locks in your interest rate for the life of the loan, creating predictable long-term borrowing costs. This type of HECM only offers one payout option: a single lump-sum disbursement at closing.

Fixed-rate HECMs are a good option for seniors who prefer predictability. You don’t have to worry about how future rate increases will affect your loan balance, and the structure is easy to understand.

However, these benefits do come with limitations. Borrowers can’t access additional funds down the road, and fixed-rate HECMs typically offer lower total borrowing amounts compared to adjustable-rate options.

What is an adjustable-rate HECM?

An adjustable-rate HECM uses a variable interest rate, which changes with market conditions. Because the rate can be adjusted over time, the HUD offers greater payout flexibility. Borrowers can choose from multiple disbursement options, including a line of credit, monthly payments, or a lump sum.

One of the biggest advantages of the adjustable-rate HECM is the line of credit option. Unlike traditional loans, an unused reverse mortgage line of credit grows over time, giving you increasing borrowing power. This makes it especially valuable for retirees looking to manage rising costs over time.

However, your interest rate may rise over the years, causing your loan balance to grow faster. While adjustable-rate HECMs include annual and lifetime rate caps, the future cost is still less predictable than a fixed-rate loan.

How interest rate changes affect your long-term costs

Both types of HECMs accrue interest on the funds you borrow, but the way these costs develop can differ significantly. With a fixed-rate HECM, your interest rate stays the same for the entire loan term. The balance grows predictably, but interest begins accruing immediately on the full lump sum, even if you don’t need all the cash right away.

With an adjustable-rate HECM, your rate adjusts periodically based on market conditions. If rates rise, the loan balance may grow faster. If rates remain stable or drop, the balance could grow more slowly. Adjustable-rate HECMs also include annual adjustment limits and lifetime caps that help protect borrowers from excessive increases, but future costs remain variable.

Which HECM offers a higher payout?

In most cases, adjustable-rate HECMs allow for a higher payout. The HUD structures fixed-rate HECMs more conservatively because borrowers must take the entire lump sum at closing, thereby increasing the program’s risk. With an adjustable-rate HECM, borrowers can withdraw funds over time, allowing lenders to offer access to more equity overall. While some borrowers prefer the security of a fixed rate, those seeking maximum borrowing power often find the adjustable-rate HECM more favorable.

Who should consider a fixed-rate HECM?

A fixed-rate HECM may be the better fit if you value predictability and don’t expect to need additional funds later. Borrowers who need a large lump-sum payment to pay off an existing mortgage or cover a significant expense at closing often prefer the fixed-rate structure. It also appeals to seniors who want a straightforward loan without future rate adjustments.

Who should consider an adjustable-rate HECM?

An adjustable-rate HECM is usually the better choice for borrowers who want long-term access to their equity. If you’re planning to remain in your home for many years, need flexible access to funds, or want the line of credit’s growth feature, the adjustable-rate HECM provides the most options.

Seniors looking to manage future medical costs, home maintenance needs, or rising living expenses may appreciate having a reserve of funds they can draw on when needed. Because you only accrue interest on what you actually withdraw, adjustable-rate HECMs also give you more control over your long-term loan balance.

Fixed vs. adjustable-rate HECM: The bottom line

Choosing between a fixed-rate and adjustable-rate HECM depends on your financial goals and comfort level. A fixed-rate reverse mortgage offers stability, but limits your access to future funds. In comparison, an adjustable-rate HECM provides more flexibility and access to a line of credit, but comes with more uncertainty. Before deciding, consider how you plan to use your home equity, how long you expect to stay in your home, and whether your needs may change in the future.