If you’re considering a Home Equity Conversion Mortgage (HECM) – also known as a reverse mortgage – you likely have several questions, especially about interest rates. With reverse mortgage interest rates playing a role in how much you may qualify for in funds, it’s important to have an understanding of how they work – and above all else, how they affect your loan. But it’s no secret that interest rates are not always easy to understand. So, what exactly do you need to know? We’ve compiled the most frequently asked reverse mortgage questions to help you navigate reverse mortgage interest rates.
“How do reverse mortgage interest rates affect my loan?”
Just like most other loans and “forward” mortgages, reverse mortgage interest rates apply to the funds you receive from your loan and determine the amount of interest you’ll pay. Calculated on a daily basis, interest charges are added to the monthly loan balance and are reflected on every borrower’s monthly statement. However, with reverse mortgages, these interest payments are deferred until your loan becomes due1 – they are not paid up-front, out-of-pocket, or monthly, as long as you meet the terms of the loan.
And when it comes to reverse mortgages, interest rates have another implication – factoring the amount you may be eligible to borrow. The Department of Housing and Urban Development (HUD) uses a specific table for all HECM reverse mortgages to determine available loan amounts for borrowers – known as the “principal limit.” While there are several factors that determine the principal limit of a loan, the primary factors taken into consideration are the borrower’s age, home value, and current interest rates. And while all reverse mortgage companies use the same HUD table to calculate the principal limit, the interest rates offered can differ from lender to lender – affecting how much you may be eligible for in proceeds. With this in mind, you’ll want to shop around and compare lenders. Check out our blog for what look for when selecting a reverse mortgage lender. At Longbridge Financial, we offer industry-leading pricing, with low rates and other special pricing programs for those who qualify.
Interest rates are doubly important to reverse mortgages because they impact not only how much you’ll pay in interest – but also how much in proceeds you’ll be eligible to receive. Rates have an inverse relationship with proceeds, so the lower your interest rate, the higher the proceeds you can expect to receive. And like other mortgage loans, reverse mortgages come with two interest rate options – fixed and adjustable rates (ARMs). So, which one is best suited for you?
Reverse Mortgage Fixed Rates
As the name suggests, “fixed” interest rates remain the same for the life of the reverse mortgage loan. If you opt for a fixed rate on your reverse mortgage, you’ll receive a single lump sum disbursement of all available funds at the time of closing.
While many seniors have been raised on the mindset of fixed rates being the “only way to go,” the reality is that it ultimately depends on your situation – and how you plan on using your loan proceeds. For borrowers planning on using reverse mortgage proceeds for large one-time expenses such as purchasing a new home or paying off an existing mortgage balance, the fixed rate may be most appealing.
Reverse Mortgage Adjustable Rates (ARMs)
Unlike fixed rates, adjustable rates mortgages (ARMs) change either on a monthly or annual basis. As a borrower, your reverse mortgage lender should consult with you to determine which specific rate is best suited to your situation. At Longbridge Financial, our Loan Officers are experts in the business – and will be there every step of the way to offer personalized, professional support and guidance.
With adjustable rate mortgages, there are two main components – an index and a margin. The index is a standard rate that changes with market interest rates, while the margin is the percentage of interest that is added to the index by the lender. While the index fluctuates, the margin does not change over the life of the loan.
While adjustable rates do not have the stability of a “locked-in” rate at the time of closing, they offer greater flexibility with additional methods of fund disbursement:
This method of distribution is the same as the fixed rate method. As a borrower, you’ll receive your initial disbursement of proceeds in a lump sum.
Line of Credit
The reverse mortgage line of credit option allows you to take a portion of available funds at the time of closing and leave the rest in a line of credit that grows over time. As a borrower, you’ll only pay interest and annual mortgage insurance premiums on the amount of funds you’ve withdrawn. Better yet, the funds remaining in your line of credit will continue to increase annually – giving you additional borrowing potential for later on. And unlike standard Home Equity Lines of Credit (HELOCs), reverse mortgage lines of credit cannot be frozen or lowered so long as you meet the terms of the loan.
A monthly payout distribution has two options. You can either opt for a term payout, which provides fixed monthly payments for a set number of years, or a tenure payout, in which you are provided fixed monthly payments for as long as you meet loan terms. Like the line of credit, the monthly payout option only requires you to pay interest and fees on the funds that have been drawn, so you can keep your loan balance low while strategically leveraging your home equity.
Any Combination of These Methods
Not set on any single one of these methods? You can also opt for a combination of any of these in planning how you will receive your reverse mortgage proceeds.
“How can I make sure I’m getting the best available rate?”
Like all financial programs, reverse mortgages are a big decision – and the best place you can start is by doing your research. When it comes to rates, take a careful look at all programs and payment options as listed above. And in shopping around, be sure to receive written quotes with the same date-of-birth of all borrowers within the same calendar week for the most accurate side-by-side comparison.
Considering tapping into your home equity with a reverse mortgage? Today’s low interest rates make now a favorable time to do so. Low rates, combined with today’s high home values, create an environment for higher reverse mortgage loan proceeds. However, these rates won’t stay low forever – and are only expected to climb. And the higher the expected interest rate, the less money you’ll be eligible to receive. The difference could be tens of thousands of dollars, which is why it’s important to fully understand the implications.
Take, for example, a 70-year old borrower with a $400,000 home. With today’s approximate interest rate of 2.360%2, this borrower would be eligible for $221,600 in reverse mortgage proceeds. However, when this interest rate goes up just 0.5%, these proceeds decrease to just $208,800. And should the interest rate increase 1%, these proceeds would dip even further to just $197,200.
The table below illustrates this scenario, in which the interest rate indicates the amount they’ll pay on the loan. The expected rate is an interest rate value used in calculating the amount of proceeds the borrower will receive with the reverse mortgage. It’s important to note that the expected rate is used solely for computational purposes and is not the actual interest rate at which the reverse mortgage loan accrues interest.
Take a look at the numbers2.
|Index||Today||Today + 0.50%||Today + 1.00%|
|% of Home Value (Principal Limit Factor)||55.40%||52.20%||49.3%|
|$ of Home Value (Proceeds)||$221,600||$208,800||$197,200|
At Longbridge Financial, we’re committed to providing the information and education you need to determine whether or not a reverse mortgage is right for you. We get to know you and take the time to understand your situation, so we can offer solutions that are tailored to your needs. And if we ever feel that a reverse mortgage isn’t right for you, we will tell you so.