Most people are aware that they receive a percentage of their home’s value or the Government lending limit (whichever is less) based on their age when qualifying for a Reverse Mortgage loan. However, what many consumers are not aware of is the effect of the “Expected Interest Rate” as it correlates to their available proceeds on a Reverse Mortgage loan. The Expected Interest Rate is not the interest rate at which an individual Reverse Mortgage loan accrues interest, but the rate which is used to determine how much money the borrower will receive with the HUD reverse mortgage calculator. This rate is very important as the higher the expected interest rate, the less money the borrowers receive and the difference can amount to as much as tens of thousands of dollars.
The existing HUD Reverse Mortgage Floor Rate is 5.00%. What this means is that once your expected interest rate for the Reverse mortgage exceeds 5.00% the available proceeds for your scenario will start to decrease with every incremental increase in this rate. Currently the vast majority of loans for Fixed Rate product on the market as of today are being offered around 4.99 or 5.06% interest rates which put those loans right at the floor and allow for borrowers to receive the max potential dollar amount based on their age.
However, recent increases to the LIBOR Rate (London Interbank Offered Rate), which is the rate for which all Adjustable Rate Reverse Mortgages are based on have taken these loans expected rates as of today 12/20/10 over the 5.00% floor rate for all margins currently being offered. As of today, the average margin on an Adjustable Rate Reverse Mortgage is approximately 2.00 – 2.25% with some as low as 1.75% and as high as 3.00% depending on what the individual company has available to offer.
Meanwhile, the 10 year LIBOR Index came out this morning at 3.54%. This means an Expected Rate range of 5.29% to as high as 6.54% if you were to apply for an Adjustable Rate Reverse Mortgage today.The LIBOR Index is updated on a weekly basis for the Reverse Mortgage Calculator. This means that from week to week, the amount of funds available to a borrower can change if they are in the shopping or pre-application phase of their transaction.
This does not necessarily affect those borrowers already in the application process because of the way the Expected Interest Rate can be locked in. The way the Expected Rate lock works is that a borrower has 120 day lock on their Expected Rate as of the date of their loan application based on their case number assignment date. For example, if a borrower were to have applied for a Reverse Mortgage on September 23rd, 2010 and their case number was assigned by their Lender on October 4th, 2010 their expected interest rate from September 23rd would be in effect for 120 days from October 4th.
The borrower is also allotted the option of taking the current rate at time of closing if in fact the Expected Rate was lower than locked in at application if they are still within their 120 day window. However, if a borrower is outside of their 120 day lock due to varying circumstances or delays, they no longer have their lock and are forced to take the current available rate at time of closing, or put the loan on hold and float their rate or cancel their transaction. For those that choose to float must be aware of any potential expiring documents that are pertinent to their file such as their Appraisal when choosing this option. Also, they must be aware that if rates continue to increase, their proceeds would be further affected.
Timing the market for interest rates has always been one of the toughest tasks to accomplish and hindsight is always 20/20, but all in all, this is something to keep our eyes on as we head into 2011. Rates appear, for the time being to be on the rise slightly, however they are still down considerably from years past and who’s to say what the trend will be for the first quarter of 2011.
The Reverse Mortgage still remains a viable program for many Americans to consider when planning their retirements. Even with increased rates and reduced proceeds in some instances, the Reverse Mortgage for some still is a night and day difference in simplifying their life and retirement.