Understanding Reverse Mortgage Interest Rates
Reverse mortgages were introduced in the early 1960s as a way to help senior citizens access the equity they had built into their homes. In 1987, the U.S. Department of Housing and Urban Development systematized reverse mortgages. The agency continues to administer them to people age 62 and older. A reverse mortgage will allow the borrower to withdraw part of their home equity in a lump sum, incremental payments, or as needed. An ideal candidate for a reverse mortgage meets the age requirement, currently lives in their home, and has paid down a considerable amount of their mortgage or paid it off completely. Lenders also will look at a loan applicant’s income, assets, monthly credit history, and living expenses when it comes to determining reverse mortgage interest rates.
Other factors affecting the amount of a reverse loan include current reverse mortgage interest rates, the age of the youngest borrower or eligible non-borrowing spouse, and the appraisal of the house. The fees for a reverse mortgage, which you can finance with the proceeds of the loan, include mortgage insurance payments, third-party charges, an origination fee, interest, and servicing fees.
What are the Options for Reverse Mortgage Rates?
The reverse mortgage interest rates that borrowers receive are important. they determine how much the borrower pays for the loan and the amount they can borrow. Lower reverse mortgage rates will allow borrowers to cash out more of their home equity.
Two types of interest rates are available for borrowers: adjustable rates and fixed rates. Currently, a majority of reverse mortgage rates are adjustable.
- Fixed reverse mortgage rates: These rates, which do not change over the life of the mortgage, are only available for borrowers who opt for a lump sum payment. This means the borrower takes the entire loan balance when they close the loan. This type of payout is often issued when borrowers choose to pay off the home’s mortgage or a more expensive debt.
- Adjustable reverse mortgage rates: These rates apply to borrowers who choose to receive the proceeds of their loan in incremental payments, whether that be monthly or as a line of credit. This allows the borrower to withdraw money when needed rather than receive regular payments. These types of reverse mortgage rates will change over the years as the market changes. You can use reverse mortgages with adjustable payments to supplement your income. If you choose to take payment in the form of an equity line of credit, however, you can use the money for large expenses, such as unforeseen medical bills or vacations.
How Do Lenders Calculate Reverse Mortgage Interest Rates?
Lenders use different methods to calculate interest rates for fixed-rate and adjustable rate loans.
Adjustable Reverse Mortgage Interest Rates
The reverse mortgage rates are dependent on two factors: an index and a margin. When calculated together, these figures produce the adjustable rate applied to the borrower’s reverse mortgage.
Here’s how it works. Lenders first consider the index, which is a standard rate that fluctuates in relation to market interest rates. They do not control the index. Interest rates can increase or decrease based on whether the index goes up or down. Lenders use a published financial index, such as the one-month or one-year London Interbank Offered Rate (LIBOR), which is the rate that banks borrow from each other, to determine the index for each loan. You can easily find the current LIBOR online.
Secondly, lenders look at the margin. This is an interest percentage that the lender adds to the index. It is the money that the lender makes on the loan. After the lender originates the loan, the margin cannot change, even if the index changes.
The rate that you pay is the total of the index and the margin. For example, if the current LIBOR is .90 percent and the lender’s margin is 2.1 percent, the fully-indexed rate is 3 percent.
Two other factors will play into adjustable interest rates over the life of the loan. Rate caps will set a maximum rate the loan can incur. For example, if your rate cap is 8 percent but your fully-indexed rate increases to 9.5 percent at some point, you will only be charged 8 percent on the loan.
On the other end of the spectrum, rate floors determine how low a rate can drop. If your rate floor is 3 percent, for example, you will always pay at least that amount. Even if the sum of your index and margin drop below it, you’ll still be responsible for 3 percent.
Fixed Reverse Mortgage Interest Rates
Market forces that typically keep rates stable establish fixed interest rates. Other loan factors also contribute to the rates that lenders assign to specific loans. For example, if the current market rate for fixed mortgages is 4.36 percent, you could receive that rate or a rate close to that on your loan depending on how well you meet certain qualifications.
What Are the Current Reverse Mortgage Rates?
Individual lenders can establish the interest rates for borrowers. However, the competition and market pressure plays a huge part in setting the rates. American anti-trust laws do not allow banks to coordinate interest rates and fees with rival financial institutions. Unfortunately, banks take their competition into account when setting rates. As a result, many use the same indices when setting rates.
One of the most popular indices is the daily Wall Street Journal Prime Rate. They calculate the rate from the prime interest rates that banks offer their top customers. When banks set these rates, they consider how much it will cost them to pay their depositors for the money they lend borrowers.
An adjustable interest rate changes as the index it is associated with, such as the LIBOR, moves up and down.
Here is an example of adjustable and fixed reverse mortgage rates.
|Average of Current Reverse Mortgage Interest Rates|
|March 2017||April 2017||May 2017|
|4.62 %||4.55 %||4.51 %|
Which is Better: Adjustable or Fixed Reverse Mortgage Interest Rates?
Choosing which option carries the best reverse mortgage rates depends on each applicant’s situation. Borrowers should consider their long-term financial needs. They should also consider how long they will be able to live in their house before making a decision. This is important since living in the residence is a stipulation of a reverse mortgage loan.
Borrowers who take out a reverse mortgage with a fixed interest rate must take the loan in a lump sum. While a cash windfall can be a boon in the short term, and can fund large expenses like vacations and home improvements, borrowers should be sure they won’t need the money later down the road. This option does come with limits. Borrowers can only withdraw 60 percent of the limit of the loan for non-mandatory expenses without paying a higher upfront mortgage insurance premium.
Reverse mortgage interest rates that are adjustable do offer more flexibility. However, borrowers take on the risk of paying much higher interest rates if the market fluctuates. If you wait to use the money, it can pay off. The principle may grow during that time and lenders only charge interest when you withdraw money. Payment options for reverse mortgages with adjustable interest rates include monthly payments, a line of credit, a lump sum, or a combination of those options.
Used wisely, this type of payment can help when seniors face large medical bills or other unexpected expenses. It can also provide a supplemental monthly income or a safety net for the future.
If you qualify and have an interest in getting a reverse mortgage should seek out a financial counselor first. They can help you decide which type of payment option is best for your situation.