Many homeowners understand that when they qualify for a reverse mortgage, they’re eligible for a loan amount that’s a percentage of their home’s value or the HUD Lending limit, whichever is lower.  This amount, commonly known as the ‘Principal Limit,’ is a key factor in reverse mortgages.

Yet, the ‘Expected Rate’ is a lesser-known aspect that significantly impacts the available funds from a reverse mortgage.  Understanding how this rate influences the loan proceeds is crucial for consumers considering a reverse mortgage.

Reverse Mortgage Expected Rate – The Key to the Principle Limit

Reverse Mortgage Expected Rate: Impact and Importance

The ‘expected rate’ in a reverse mortgage plays a pivotal role, though it’s often misunderstood.  It’s important to understand that this rate is not the one at which interest starts accruing on your loan.  Moreover, it’s not a forecast of rate changes or a constant rate throughout the loan’s life.

HUD uses the expected rate in its calculations, deriving it from a different, usually higher, index than the one used for calculating the loan’s interest accrual at the time of application.

Specifically, the expected rate is based on a 10-year index, contrasting with the lower 1-month or 1-year index used for adjustable-rate reverse mortgages.  For fixed-rate loans, the expected rate is simply the Note Rate, remaining constant over time.

So, why is this important? The expected rate directly influences the loan proceeds you receive.  With current interest rates at or above the HUD floor rate, the expected rate becomes a decisive factor in determining the amount of money borrowers can access through the program. Understanding this rate is key to fully grasping the financial implications of a reverse mortgage.

What is the HUD Floor Rate?

The HUD floor rate is currently set at 3%.  This rate acts as a benchmark: if the expected interest rate for a reverse mortgage is at or below this 3% floor, borrowers qualify for the maximum loan amount permitted by the program’s guidelines.

However, the situation changes when the expected interest rate rises above 3%.  In such cases, the amount of money a borrower is eligible to receive starts to decrease.  In today’s market, all fixed-rate reverse mortgages have interest rates above 3%, resulting in lower loan amounts for borrowers.

Conversely, until recently, adjustable-rate options often had interest rates at or below the 3% mark, allowing borrowers to access the maximum funds based on their age and property value or the HECM lending limit, whichever is lower.

As interest rates climb, borrowers will notice a corresponding decrease in the loan proceeds they can receive.  This trend continues unless the expected rate is locked in for 120 days from the application date once the lender receives a Case Number assignment from HUD.

Weekly Fluctuations of the Expected Rate: A Time-Sensitive Matter

In a market where interest rates are on the rise, the weekly changes in the expected rate become critically important.  This is because securing your application quickly allows you to lock in your loan proceeds at the current expected rate.  It’s important to note that while this lock does not fix your interest rates or closing costs, it does secure the amount of loan you can access based on the current expected rate.

In a climate of increasing rates, particularly when they exceed the HUD floor, any rise in rates can reduce the loan amount available.  This often results in borrowers being surprised or disappointed when they discover they are eligible for less than they initially anticipated or require due to rate increases.

If you’re considering using the rate lock but anticipate potential delays (like appraisal setbacks, mandatory repair works, or additional requirements from HUD), it’s wise not to wait until the last minute.  Delays can often be beyond your control, and you wouldn’t want to risk losing your rate lock benefits.

Predicting the ‘perfect’ time to secure a loan is always challenging.  While property values are currently rising, so are interest rates.  It’s essential to remember that acting now could still be beneficial.

For instance, if you secure a loan now but don’t utilize the entire amount immediately, the unused funds in a line of credit can potentially grow over time.  This can be more advantageous than the diminishing loan amounts you might face as interest rates climb.

Expected Rate FAQs


What is the expected rate in reverse mortgages?

The expected rate in a reverse mortgage is the rate that factors into the loan-to-value (LTV) calculation along with the age(s) of the borrower(s) and/or youngest spouse.  The expected rate is not the rate at which the loan accrues interest and is used solely for the initial loan calculations.


How does the expected rate determine my loan amount?

The expected rate determines your loan amount, as that is how HUD has set up the product. HUD has an extensive Principal Limit Factors table for all expected rates and ages.  The higher the expected rate goes, the lower the loan-to-value (LTV) will be.


Is the expected rate what the lender expects rates to be in the future?

No, the expected rate is not what the lender expects rates to be in the future.  For an adjustable-rate loan, the expected rate is the 10-year index plus the margin, and for a fixed-rate loan, the expected rate is the interest rate.


What happens if the expected rate is lower at the time my loan locks?

If the expected rate is lower at the time your loan locks, you will benefit from the improvement in the rate.  If the improvement in the rate causes your loan to move down on the Principal Limit Table, you will receive a higher loan to value.


What happens if the expected rate is higher at the time my loan locks?

If the expected rate is higher at the time your loan locks, one of two things will happen.  If you are still in your expected rate lock window from the time of your initial application (120 days) you get the better rate from your initial application.  If you are outside your expected rate lock window, then you will be subject to the higher rate.