Reverse Mortgage Rates
If you’re curious about where reverse mortgage interest rates are, and more importantly how rates impact the program – this is a good place to start.
To begin with, there are actually two Rates that affect a reverse mortgage.
The EXPECTED Rate is a one-time rate used to determine the percentage of home value that can be accessed, also known as the Principal Limit.
The INITIAL rate determines your interest accrual and CREDITLINE growth.
First, we need to understand what makes up an INITIAL interest rate.
Adjustable or Variable interest rates consist of a margin, which is the fixed portion of the rate (and will never fluctuate), and an index, the portion of the interest rate that changes. The lower the margin, the less interest will accrue on the loan over time. At the same time, the reverse mortgage credit line will increase at that same low rate. Higher margins will of course result in higher interest accruing along with higher credit line growth.
Unique only to reverse mortgages – Over time, the Unused CREDITLINE portion will increase over the original amount.
CREDITLINE growth rates are typically higher (approximately 4X) than Money market or CD rates, which are (averaging 1.25% as of September 2015)
There are two types of Variable rate reverse mortgage products, Annual and Monthly adjusting.
The Annual variable rate product:
- index based on 1 year LIBOR
- rate adjusts Once every 12 months
- rate can go up or down a maximum of 2% yearly
- MAXIMUM INTEREST RATE CAP is 5% ABOVE INITIAL RATE
The Monthly variable rate product:
- index based on 1 month LIBOR
- rate adjusts once per month (based on previous 12 month average)
- MAXIMUM INTEREST RATE CAP is 10% ABOVE INITIAL RATE
Fixed interest rates on a reverse mortgage are fixed for the duration of the loan, there is no term (15, 20, 30 yrs, etc). keep in mind, there is NO CREDITLINE on a Fixed rate reverse mortgage. Funds are distributed in a single lump sum.
Additionally, HUD imposes a 1.25% ongoing Mortgage Insurance Premium, which is added to the interest rate.
This is an example of how an Annual Adjustable INITIAL interest rate is calculated:
- 2.00% Margin
- 0.85% Index
- 1.25% mortgage insurance premium
- 4.10% initial interest rate which also results in a 4.10% CREDITLINE growth rate
Interest, as well as the CREDITLINE growth, on a reverse mortgage is compounding.