When considering a Home Equity Conversion Mortgage (HECM) quote, more commonly known as a federally-insured reverse mortgage loan, you will likely have questions about interest rates. After all, these rates play a big part in how much money you can qualify for. Unlike reverse mortgage fees, interest rates are not always easy to understand. It is essential however to learn the answers to commonly asked questions in order to choose the reverse mortgage loan that would be the most beneficial for you.
As with most other loans and credit lines, reverse mortgage interest rates are charged on the funds that you receive from your loan. These charges are calculated daily and added to the loan balance monthly, and can be found on every borrower’s monthly statement.
The unique part about reverse mortgages is that interest payments on your loan are deferred to the end of the life of the loan: they are not paid up-front, out-of-pocket, or monthly. While most loans require monthly minimum payments to repay the loan balance and all associated interest charges over time, reverse mortgages defer all loan and interest repayment to when the loan matures. Reverse mortgage loan maturity events come about if:
In your research, there is some interest rate jargon that may intimidate you from getting a reverse mortgage, but there is no need to worry. With help from this article and your personal reverse mortgage professional, you can learn everything you need to know. Read on for important insight into reverse mortgage interest rates.
Fixed interest rates are usually decided upon by investors and various government agencies whose job it is to keep these rates stable. As an example, the National Reverse Mortgage Lenders Association (NRMLA) reverse mortgage calculator lists an average HECM fixed rate of 5.060% for the month of December 2016. Actual rates available to borrowers will vary and are dependent on loan factors.
Variable rates are different from fixed rates in that they are composed of two parts: an Index and a Margin.
According to a recent HECMCounselors.org training manual on reverse mortgages, these rates have come to be a favorite in the HECM marketplace since 2009, with about 67% of originated reverse mortgage loans having a fixed rate. They are popular with borrowers because they eliminate the risk that their rate will increase. But, this does not necessarily mean that it is the best loan type for you. There are pros and cons to a fixed rate loan:
Due to these details, fixed rate reverse mortgages are usually best for borrowers who plan to use their reverse mortgage funds all at once, such as to pay off an existing mortgage or other debt, or to make major home repairs or modifications.
The less popular, but oftentimes the more flexible option, is the variable rate. Just as the fixed rate is “fixed” for the loan period, a variable rate varies throughout the loan period. There are pros and cons to variable rate reverse mortgages:
In general, variable rates are best for borrowers who plan to use their reverse mortgage funds over time, or in rare instances. In this way, borrowers may use it to add to their existing fixed income every month, to supplement their other retirement accounts, or as a stand by account so money is readily available in the case of an emergency.
All variable rates are subject to reset to the market-based index rate at a predetermined frequency. How often the rate on your variable rate loan will change depends on the frequency you choose. Here are your frequency options:
This is related to variable rate loans also known as the note rate. This is the rate that is used to calculate interest through the life of the loan, and it will be the borrower’s interest rate for the first month or year of the loan. The reason for the short term is because the rate will only be in effect for the first LIBOR index rate period. When the lender uses the LIBOR, the IIR will be based on the 1-month LIBOR. The 1 year LIBOR is also possible but not as common.
This may apply to both variable and fixed rate loans. The Expected Interest Rate is what the lender estimates the average rate will be over the life of the loan. For a variable rate loan, it is based on a 10-year index such as the 10-year Treasury rate. For a fixed-rate HECM, the Expected Interest Rate is the exact same as the Initial Interest Rate because the rate will not change over the loan term. The reason for the long-term index is because it is an attempted prediction of the rates over the loan’s life. The EIR never changes during the life of the loan. There are a few reasons that the EIR is used:
Also known as the Total Loan Rate, this is the rate at which the balance of your HECM reverse mortgage loan grows. It is the sum of two charges:
For borrowers who choose the line of credit disbursement option, it is good to note that the credit line grows at the same rate that the loan balance does.
There are a few reasons why choosing the best rate for your situation is important:
Since there are no monthly mortgage payments, reverse mortgage rate increases won’t make the loan unaffordable to you. When compared to traditional forward mortgages, the reverse mortgage loan holds an advantage in the sense that there is no threat of an unexpected mortgage payment increase due to inflated market rates.
There are also a few other factors that interact with your interest rates that determine how much money is available to you from a reverse mortgage:
A solid combination of older age, lower mortgage balance, higher appraised home value, and lower interest rates will help garner you the most funds possible. Try our reverse mortgage calculator by clicking here. It requires no personal information and estimates the total proceeds you may receive from a reverse mortgage.
Your interest rate depends on a culmination of a few factors:
Using this information, a reverse mortgage professional can help you figure out what your reverse mortgage interest rate will be. The best way to understand your rates would be to speak with your reverse mortgage professional and get a customized quote based on your individual situation. Call us today at 1-800-AAG-0103 to learn more from your friendly reverse mortgage professional.
Disclaimer notice: Interest rates mentioned are for illustrative purposes only and are not an offer to lend. Interest rates and amortization, mortgage insurance premiums (MIP), origination fees, lender margins, payment options and closing costs are subject to change and may vary. Amortization tables and APR calculations will be provided by your lender in the loan application package. A good faith estimate of closing costs, TALC (Total Annual Loan Cost) disclosure and other disclosures will also be provided on the loan application as required by the Truth in Lending Act and Regulation Z.
“Reverse Mortgage Interest Rates and Examples.” ReverseMortgageAlert.com. NP. ND. Web. 18 Sept 2015. http://reversemortgagealert.org/reverse-mortgage-rates/
“Introduction to Home Equity Conversion Mortgages (HECM).” HECMCounselors.org. Neighborworks America. 2010. 18 Sept 2015. http://www.hecmcounselors.org/sites/default/files/uploads/pdfs/HO111%20Manual_FINAL_11082011.pdf
“Reverse Mortgage Interest Rates.” ReverseMortgageStore.com. NP. ND. Web. 18 Sept 2015. http://www.reversemortgagestore.com/Rates%20Sheet.html