Most people are aware that they will receive a percentage of their home’s value or the HUD Lending limit (whichever is less) based on their age when qualifying for a reverse mortgage. This maximum loan amount available to the borrower is referred to as the “Principal Limit”.
However, something of which many consumers are not aware is the effect of the “Expected Interest Rate” as it applies to their available proceeds on a Reverse Mortgage Loan.
The Expected Interest Rate is a rate used at the start of the adjustable rate loan to determine the amount of proceeds the borrower will receive under the program but it isn’t one at which the borrower starts to accrue interest for their loan, it isn’t based on a projected change and it isn’t even a rate borrower can rely on being in effect at any time during the loan.
HUD uses this rate through the reverse mortgage calculator based on a different index that is higher than the index used to calculate the interest accrual on the loan in effect at the time the borrower applies.
This rate is based on a 10-year index instead of the lower 1-month or 1-year index that would be used for the adjustable rate reverse mortgage. The expected rate for the fixed rate loan is always just the Note Rate as it is not subject to changes. But what difference does this make you might ask?
It can change the amount of money you receive with your loan as the loan proceeds are determined by the expected interest rate. That makes all the difference in some cases as to how much money borrowers receive under the program and that’s because we are now at or above the HUD floor with today’s interest rates. Let me explain.
What is the HUD floor rate?
The HUD floor for interest rates is 3%. This means that if the expected interest rate is at or below the floor of 3%, the borrower will receive the maximum available under the program parameters.
However, once the expected interest rate exceeds 3%, the amount of money the borrower receives begins to decline. In today’s market, all fixed rates are pretty much over 3% so borrowers receive less money under the fixed rate options.
But up until recently, the adjustable options were still at or under 3% giving borrowers the maximum available funds for their age and property value (or HUD lending limit, whichever is less).
As interest rates increase, borrowers see that the proceeds continue to decrease unless the expected rate has been locked, which happens for 120 days from the date of application when the lender receives a Case Number assignment from HUD.
The Expected Rate Changes Weekly Making it Time Sensitive
This means that it is important to request and return your application as soon as possible in an upward rate market so that you can lock your loan proceeds in with the expected rate lock. The expected rate lock does not lock in your rates or closing costs, but you can lock in your loan amount available by locking in the expected rate.
Many borrowers like to ponder the decision of a reverse mortgage and it is not one to take lightly but unfortunately in a rising interest rate market that the rates are above the floor, every time the rates increase the proceeds to the borrower decrease and borrowers are often shocked or disappointed to find that they no longer receive the amount they thought they would or even need when the rates have increased beyond a certain point.
Borrowers can still place things on a brief hold after their application and rate lock are secure, but the timeframe to close the loan is 120 days and then the lock is no longer valid and the borrower would move to the current market.
So if you plan to use the rate lock then employ a slight delay, remember that often times there are delays that are out of your control (appraisal delays, HUD can require a second appraisal, repairs needed, etc.) and you would not want to wait until the last moment if you wish to proceed.
Timing the market for the perfect time to get a loan, any loan, is always a very difficult thing to do. Property values are on the rise now but so are interest rates. Hindsight always has 20/20 vision but remember, there are other reasons why now may still be the best time to act for you.
If you have income now that you rely on for qualification, the future holds no promises. If you do get your loan now and you do not need to use it all, the money you leave in a line of credit grows over time (which is much better than the money you lose from shrinking loan amounts as rates rise).
Will home values rise or will there be a correction?
No one can answer that for sure but if they do continue to rise and the rates do not rise with them (a rise in values and rates would most likely eliminate the added benefits with the lower Principal Limits or loan amounts available at the higher rates) you can always consider refinancing your reverse mortgage in the future if the market and factors make a refinance reasonable.
If it doesn’t continue to rise or values fall, any reverse mortgage you close before the fall in values would not be adversely affected. In short, the reverse mortgage still remains a viable program for many seniors when planning their retirements. Senior equity has never been higher, it is at an all time high. Getting a reverse mortgage now and locking in the current equity might still be the best option for many borrowers.
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