Interested In Reverse Mortgage Interest Rates?

 
Amy Catling, C.S.A.
President, Seacoast Reverse Mortgage
1-207-251-0633 or 1-800-476-2858
acatling@seacoastreversemortgage.com


Reprinted with permission from The Senior Times newspaper

Interest rates have a great deal to do with your reverse mortgage.  But understanding exactly how they affect a reverse mortgage often takes a bit of clarification.  In the article below, I refer only to the federally insured reverse mortgage product, or HECM.

One of the areas of potential confusion comes with the fact that there are two interest rates to take note of: what I’ll call the “pre-reverse mortgage” interest rate and the “post-reverse mortgage” interest rate. 

First, the “pre-reverse mortgage” interest rate (formally called the Expected Interest Rate).  When you apply for a reverse mortgage, a calculation is made to let you know the dollar amount for which you qualify.  This calculation is made based on your age, the lesser of the appraised value of your home or the federal lending limit, and what is usually referred to as the “current interest rate”.  The current interest rate means the LIBOR index (LIBOR stands for London InterBank Offered Rate).  This index was chosen for reverse mortgages due to its’ relative stability.  The lower the interest rate, and the older you are, the more money you get.  An additional note: if, on the day you close on your reverse mortgage, the interest rate is even lower than the day you applied, you automatically get the lower interest rate.  And that’s the end of the Expected Interest Rate or “pre-reverse mortgage” interest rate; it’s used only to calculate how much you get.

When you’re in the process of applying for a reverse mortgage, the Expected Interest Rate described above tells you how large your credit line or loan will be.  Now there’s another interest rate choice for you to make – the “post-reverse mortgage” interest rate.  After you close on your reverse mortgage, interest will accrue on the amount you owe, just like a conventional home equity line of credit or loan.  The rate at which that interest accrues is up to you.  The accrual rate is in your hands 1) because only you decide how much of your available money to spend, and 2) at application, you chose between an adjustable rate and a fixed rate reverse mortgage, and 3) you can make payments if you wish.  For example, if you have a $150,000 reverse mortgage line of credit, and you use only $5,000 for roof repair and nothing else, then interest will accrue only on $5,000 (plus any costs that you may have chosen to roll into the loan).  If you choose to pay off the $5,000, then no interest will accrue because you have no balance.  Of course, the biggest advantage of a reverse mortgage is the fact that no payments whatsoever are required for as long as at least one borrower lives in the home, but the option to make payments is there if you wish.

Adjustable rate mortgages have a bad reputation, and in many cases that reputation is well deserved.  It has worked completely differently with reverse mortgages, however (you could say it has worked in reverse!).  Does it surprise you to know that of the hundreds of thousands of FHA insured reverse mortgages in existence in the country today, most are adjustable rates?  Fixed rate reverse mortgages are available, but in general that fixed rate is going to be higher than the adjustable rates, and require that you take out large sums of your available credit up front.  For someone that has a large mortgage to pay off immediately, this option might make sense.  But for most people who are looking to simply open up a line of credit that is there if they need it, a fixed rate makes less sense.  Many people think that an adjustable rate means high interest rates or a “ballooning” of the interest rate somewhere along the line.  Consider this:  one of our staff members at Seacoast Reverse Mortgage has parents who have had a federally insured reverse mortgage since 2002.  Like most, they chose a monthly adjustable reverse mortgage.  For the past 8 years, the interest rate that has accrued on their reverse mortgage balance has averaged less than 5%.  Remember, though, that when it comes to interest rates, the past is not a predictor of the future!

Hopefully, this brings some clarity to the subject of reverse mortgage interest rates.  It is one of the pieces of the reverse mortgage process that I regularly spend a lot of time on with clients, and a subject that is well worth understanding.

Amy Catling is a Reverse Mortgage Specialist, Certified Senior Advisor, and the President of Seacoast Reverse Mortgage.  She can be reached at 1-207-251-0633 or toll-free at 1-800-476-2858, or by email at acatling@seacoastreversemortgage.com.

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