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Expert Answers on Reverse Mortgage Interest Rates
Expert Answers You Can Trust!
Your reverse mortgage questions are answered by All Reverse Mortgage, Inc. CEO & industry expert Michael G. Branson, with over 40 years of experience in the mortgage banking industry.
Answered By Our Experts
I do not know if you are looking at the start rate or the expected rate and I also do not know what fees or credits you are paying or receiving. The start rate is the current index plus the margin at which you will be accruing interest on your loan.
The expected rate is a ten-year index at which you do not accrue interest, but HUD uses to determine how much money you can borrow, and they use for illustrative purposes on things like the amortization schedule, etc. to give you a better idea of what the loan is likely to do on a long-term basis. So, the longer index used for the Expected Rate will be higher than the current index, but that’s ok because you don’t accrue interest at that rate anyway.
So, if your agent is showing you a current rate of 3% for the index plus the margin, my advice to you would be to get other proposals and compare. There is a possibility that your agent is trying to roll your costs into the loan and there are lender credits being paid that I cannot see but with just the information you have provided, I think it may be too high.
I would strongly recommend that you visit our website and compare with our online calculator to see how the numbers compare. I believe you will find that you can do a lot better but only comparing will tell you for sure. It’s fast and easy and you are under no obligation. If you can save thousands of dollars by doing a quick comparison, it’s certainly worth the effort.
The loans are sold into GNMA (Ginny Mae) securities, and the lender cannot renegotiate the rates as the investors (who can be anyone from a large insurance company to a single individual who buys the bonds) do so knowing the rate of return based on the rates of the mortgages that secure the bonds. You can, however, refinance the loan with a new reverse mortgage under the current terms as long as both you and the property still qualify.
The interest is compounding so that as the balance grows if you make no payments on the loan, you are also accruing interest on the growing balance.
However, the good thing about the reverse mortgage is that even though there is no payment due on the loan as long as you live in the property, there is also never a prepayment penalty and you can choose to make any payment in any amount at any time, up to and including payment in full, without penalty.
This means that if you want to keep the interest from compounding, you can choose to make a payment if you would like and many people do make payments on their reverse mortgages.
But since there is no payment due, if something comes up any month, there are no consequences to your credit or otherwise if you choose not to make a payment that month.
It is entire your choice.
The best way to get the best rates, fees, etc. is to not be afraid to shop around. Look at the entire proposal, not just one aspect.
Some companies have ownership interest in appraisal management companies and will give borrowers appraisals for $100 less than the market cost of an appraisal and borrowers see this one fee and go with a company with higher rates or worse service ratings, all trying to save that very small initial fee differential.
The interest cost over the years may be many thousands of dollars higher but because they don’t see that initial cost, they miss the much greater long-term expense.
Yes, you can pay any amount up to payment in full at any time without penalty. If you do make payments, if you want to keep the loan open, just be sure you never pay the loan down to a zero (0) balance as that would lead to the loan being closed at that time.
The interest rate remains the same, but you must remember that the interest that you accrue is based on the unpaid balance. Since you do not have to make any payments with a reverse mortgage, if you allow the balance to rise, the amount of interest you accrue will also increase, even if the rate stays the same. So, in that case, yes, the amount that you will see each month will go up because the balance is also going up. If you look at the amortization schedule you receive both at application and when you close the loan, the annual interest accrual is rising.
Having said this, you do have control over this. There is never a payment required on a reverse mortgage but there is also never a prepayment penalty and you can make payment of any amount at any time. If you do not want the balance to rise at all, you can pay the interest shown on the statement. If you want to just slow it down a bit, you can pay a portion of the interest that had accrued.
If you want to begin to pay the balance down, you would have to pay more than the amount of interest that had accrued. The good thing with a reverse mortgage is that it is entirely up to you. Since there is no payment due, you are under no obligation to make any payments on the loan at all but if you want to slow the growth of the balance, stop it or pay it off entirely, you can always do so with no penalty.
Like any other loans, the rates are subject to change with market conditions. I would strongly suggest that you check our calculator at https://reverse.mortgage/calculator for up to the minute rates and fees and to see what you can qualify for at any given time. It’s easy to use, there is no personal information required (other than month and year of birth to run the calculations and your zip code).
If you like the information you see and would like more or to speak with someone, we would be happy to assist but if not, we will never pester you with endless pressure. Give it a try and see if the loan is right for you.
The amount available to heirs is always subject to the amount of money borrowed, the amount of interest that accrues and the market conditions or the value of the home at the time you pay the loan off. There is a possibility the home value will continue to rise, but while it is not probable, there can also always be a drop in the market like we had in 2008 – 2012 and at that time some properties decreased by as much as 50% of their previous value. There just really is no way to know how long you will continue to remain in the home and what future values will do.
You do have the security that even if you live in the home and accrue interest for another 20 years and values drop 50%, they can never owe more than the home is worth and if they want to keep the house, they would only have to pay the existing balance or 95% of the current market value, whichever was less. There is also never a prepayment penalty with a reverse mortgage.
If you feel that you do not want to take a chance, you could choose to sell the home now and either live in a smaller home or use a much smaller reverse mortgage to purchase a less expensive property allowing you to put money into an account and still have equity in another home accruing interest on a smaller balance owed. I don’t know if these options are viable alternatives for you but you do still have choices if the current balance and rate of interest accrual concern you.
You do not have to make any monthly payments on the reverse mortgage so the interest accrues and is added to the loan balance monthly. Assuming you do not default on the loan (move out of the house or fail to pay the taxes and insurance as they become due), the full amount is due and payable when you sell the home or no longer live in the home (such as move to permanent assisted living or pass).
Even though there are no monthly payments of principal or interest due on a monthly basis, there also is never a prepayment penalty with a reverse mortgage. This means you could pay all or any portion of the loan or interest monthly, quarterly, annually or any time you desire with no penalty. In other words, if you choose to make a payment at any time you may do so without penalty and that would keep the balance from rising and save you interest accrual, but it is not required.
Yes you can always pay off a reverse mortgage early if you choose with no penalty. The amount of time that it would take would depend on the interest rate on the loan and when you drew the additional funds so I would invite you to visit our online calculator for specific amortization questions at https://reverse.mortgage/calculator where you can determine for what benefits you would qualify and the timing available for the payout and then if you are interesting in repaying, we can tailor a repayment schedule for you by time or by amount that fits your needs.
You have to remember that payment would be entirely voluntary as there is no monthly payment due on the reverse mortgage and any amortization schedules would depend on your ability and willingness to make payments as scheduled.
The appreciation on the home does not affect the loan at all, it does affect the equity that you will have at any given time. The 4% is a number chosen for illustrative purposes only. The loan parameters are constant whether the property experiences more or less appreciation after that. The amount of the equity that you will have would definitely be affected by the higher or lower rate of appreciation though as a home that goes up in value more would mean you have more equity and one that does not rise as fast would curtail your equity in the home. But the loan terms are already established and do not change with different appreciation rates later.
Your lender can change this number and send you figures based on different appreciation rates on your amortization schedule. Most software programs allow the lenders to go down to zero appreciation so borrowers can see what would happen to their equity at different levels. At All Reverse Mortgage, Inc., we have even developed a proprietary software program that even allows you to not only change the appreciation rates, but also the interest rates both in the initial year but also in subsequent years, and you can add additional draws or repayments.
This gives you the chance to run all different “what if” scenarios to see what factors will have what effects on you. We believe borrowers should have as much information as possible to make an educated decision, even if that information leads them to decide that the loan is not right for them. We would rather you not do the loan for the right reason than do it for the wrong reason and be sorry later. Let us know if you would also like to receive information from us for comparison and let us know if you would like the interactive amortization calculator.
If you are showing $13,000 short to close, you would have to bring in $13,000 just to close the loan and then there would be no funds left over for a line of credit, all the available money would be used just to pay off your current loan. In addition, that is a loan HUD would not allow us to originate because to refinance a reverse mortgage with a new reverse mortgage, the new loan must give you certain benefits such as 5 times the cost of the loan and at least 5% of the Principal Limit for you in cash available. You would not meet either of these requirements since the loan of $300,000 would require that you have at least $15,000 in cash available at the close of the loan and that does not account for 5 times the cost of the loan.
To answer your question more fully though, the money you have on the line of credit “grows” due to the fact that when you have funds available to you, more funds are made available to you as time goes by based on a percentage of the available funds. The rate at which your line grows, or the growth rate, is equal to the rate at which you accrue interest plus the MIP accrual rate. So if your interest accrues at 4% and the MIP accrues at .5%, the unused portion of your line will grow at a rate of 4.5%.
If you had an original line of $300,000 and used all but $50,000 of it, the $50,000 is the amount that would grow at 4.5% or $2,250 that year and then the next year growth would depend on the new balance and the rate in effect at that time. This is not interest that anyone is paying you, it is more like a credit card that had a limit of $10,000 that they raised to $12,000. It does not cost you anything for the raise, if you don’t borrow it you don’t owe it but if you do borrow the funds, you begin to accrue interest on them from the date you draw them.
Your example where you are paying down the balance is good if you want to pass the largest asset possible to your heirs or if you think you may want to sell the home in the future and would be looking to get the most out of the property at sale. Otherwise, you may want to think about taking the funds and placing them in an account for your future use if needed. Your best bet though is to contact a trusted financial advisor or family members to discuss your future plans to see what works best for you.
They are not locked until the loan goes to closing. If you have a fixed rate, the rates have been very stable for a very long time and while I cannot tell you that there is no possible way things can change, the odds are you will be ok. If you have the line of credit, the starting or initial rate moves with the index weekly until it goes to closing but the Expected Rate is locked for 120 days from the date of application. The Expected Rate is the rate that determines how much money you receive under the program and so if you are not close to 120 in the process, you will be fine on the amount of money you will receive as well as long as the loan closes within that 120 day timeframe.
In this case, the reverse mortgage interest rates are no different than a traditional or forward mortgage. If you have the adjustable rate line of credit loan, the loan has an index, and a margin that is added to the index to arrive at the fully indexed accrual rate. The index, by law, has to be something that can be easily monitored and verified by the borrowers and it must be something that is out of the lender’s control. Loan programs in the past used Treasury Bills and the Prime Lending Rate as favored indices however, the indices were often volatile and became less favorable for the secondary market when using these loans as the security for issuing mortgage backed securities. Most loans today, forward and reverse, are based on the LIBOR index which is the London Interbank Offered Rate. You can read all about the London Interbank Offered Rate, it’s history and current administration online if you are curious.
Unlike the Federal Funds Rate (Fed Funds Rate) that does come from the Federal Reserve Bank, the LIBOR is the preferred rate charged from one member bank to other member banks for short term loans. Therefore, this rate is not one set by the US government.
The MIP accrues on the outstanding balance so it does increase as the balance increases as shown in you amortization schedule. However, it is added to the amount owed, not subtracted from your available line.
In fact, your line of credit grows over time as well. You should go over the amortization schedule with your loan officer and your HUD-approved counselor carefully to be certain you understand fully how the program will work before you agree to close a loan.
You would owe the amount you actually borrowed plus any interest that accrued on it. The amortization schedule is printed at the beginning and does not take any of the following into consideration (if any):
- Additional draws from the line
- Any payments you might make
- Any changes of interest accrual rate on an adjustable rate line of credit loan
A fixed rate loan would have no further draws and the interest would not change so if you made no early payments, then the amount shown as the loan balance would be the amount you would have to repay when you sold the home.
Each month you will receive a statement of activity on your reverse mortgage interest and it will outline the charges to your outstanding loan balance. It's entirely up to you whether or not you decide to make a repayment back to that interest or allow it to defer to your outstanding loan balance. You can at any time voluntarily make an interest repayment but there is no mandatory repayment due until the maturity event takes place which is either a sale of the home, failure to maintain property taxes and homeowners insurance, or you leave the home for a period longer than 12 months’ time.
There is never a prepayment penalty on a reverse mortgage and you may elect to prepay any amount up to and including payment in full of all outstanding amounts at any time you choose without penalty. Many borrowers do make prepayments to keep the balance from rising or to allow the line of credit to grow and to ensure a higher available balance later. This it certainly allowed and completely up to your discretion.
Good afternoon Ignacio,
This could go a number of ways. I think the best thing I can tell you here is that you should ask for proposal and take a look at the option that best suits your needs. When you get a proposal you get an amortization schedule that tells you in writing what your balance will be throughout the life of the loan on a yearly basis.
It may sound like I'm hedging and I might be a little bit, the problem is with just knowing the information you gave me I don't know if you're asking me if you want the loan amount to be $70,000 inclusive or exclusive of any costs, I don't know where in the country you and the property are located so I don't know what those costs will be and some states are much more expensive to take out a mortgage loan if your $70,000 does not include costs, I don't know if you want a fixed rate or an adjustable-rate loan, or if you choose the adjustable-rate loan, what future rates will do because if the rates go up or down, that would affect the balance of the payoff.
If you going to websites such as ours and ask for the proposal, you can receive all of this information as it relates to your area and the current interest rates depending on the program that you choose. There is no obligation, no high-pressure and you sure to get an amortization schedule that will reflect the information that you really want to see.
I wish I could explain, but from the information that you have presented, I cannot. There are no monthly payments due on the reverse mortgage and therefore, I cannot begin to guess what anyone would be threatening foreclosure at this point for non-payment of payments. Can you get a copy of the monthly statement from your mom? If so, I would suggest that the two of your get on a conference call together and call the lender to request status of the loan to find out any outstanding issues, if any, and resolve them.
And yes, there is always a definite amount owed and it is sent to the borrower every month in the monthly statement. Your mother should be receiving a monthly statement from the lender that outlines the amount that she owes and how much is added to that each month that she does not make a payment. I would get a copy of that statement from her immediately to review and compare with her checking account statement to verify that payments are going to that lender and then find out from them what is happening to her payments if it does not show on the statement.
Finally, I am concerned about your comment of a "broker" threatening foreclosure. Why is your mother receiving any contact from a broker? Your mother has a loan with a lender and there should be no broker involved. I would be very concerned that your mom is paying payments to someone who is not even affiliated with the loan and your review of the monthly statements and your mom's bank account will show if there are any irregularities there. If someone has talked your mom into making payments to a party to whom she should not be paying, you need to find that out as soon as possible and report that to the local authorities.
All the maximum amounts are determined by HUD in accordance with the program parameters, property value, borrowers' ages and interest rates. YOU decide how much you take out up to the maximum but there is no minimum other than the original costs of the loan - the loan cannot be started with a zero balance unlike a Home Equity Line of Credit. Feel free to calculate your loan here or call us at (800) 565-1722
Interest is charged on the outstanding balance. Because the outstanding balance does grow, the amount of interest accruing would also grow if there were no payments by the borrower. That is one thing that many borrowers do choose to do though. There is never a payment owed, but there is also never a prepayment penalty and so many choose to make some payment on the loan, whether it be monthly, quarterly, annually or just whenever they have a little extra money. In your example, the monthly interest would be $270.83. Borrowers who wish to retard or eliminate the growth of the balance might elect to make a payment if it is within their means. The great thing about a reverse mortgage is that no payment is ever required so if a month ever came where this payment was not possible due to other expenses, if it was skipped there would be no consequences other than the balance increasing.
Borrowers need to weigh the desire for equity retention with the need for reverse mortgage funds. Those who desire to maintain the most possible equity in their homes and have the wherewithal to sustain their lifestyles on their current income or have families who can help them meet their expenses might determine that the reverse mortgage is not the best alternative for them. Those who do not have benefit of family support, find that their incomes do not see them through each month's demands and realize that rental housing can often cost more than the interest they accrue on a reverse mortgage, eating through sale equity just as fast or even faster in some cases, have found that a reverse mortgage often meets their needs extremely well. We encourage all borrowers to explore all alternatives with their families and financial advisors and choose the path that is best for them.
View our current interest rates here: https://reverse.mortgage/rates
Not knowing all the particulars for your loan (age, value, existing lien to be paid and how much cash you intend to take and when), I really am not sure how to answer this question. I think I know what you're asking so let me take a stab at it and if this does not answer your question, please feel free to get back to us.
The line of credit grows on the fixed rate at a constant percentage based on the unused portion of the line yearly. In other words, as long as you don't use the line, it will continue to grow in availability by multiplying the unused portion of the line by the credit growth rate. The property value is not a factor in this computation, until you reach the HUD maximum claim amount.
Once your line reaches the HUD maximum claim amount on your documents (150% of the appraised value or the HUD maximum lending limit, whichever is less), then to receive any additional funds you would need to request an extension of the line. For example, if your property was worth $500,000 at the time you first took out your reverse mortgage, your maximum claim amount would be $750,000. If you were 70 years old living in CA with normal fees and you did not touch your line, sometime just before the end of the 16th year, between the existing balance and the line available of about $730,000+/-, you would reach the HUD maximum claim for your loan. You could draw up to the $750,000 no matter what the current value of the home was, but in order to exceed that amount, you would need to get an extension from the lender.
We were curious to see how many borrowers have actually ever been limited by this provision so we reached out to the industry's only rated servicer to ask. They have never had a borrower hit this maximum as that would take borrowers who did not access any of the line typically for over 15 years and it just hasn't happened. The President did confirm that if the property had increased in value the procedures were in place to process an extension, but that no borrower had yet even made the request so he could not comment on the viability from the valuation standpoint.
What that means is that because there are no payments, the balance grows (the amount is added onto the balance each month). When you sell your home or when you pass and your heirs sell it, then the loan and any interest that has accrued is repaid at that time.
You and your heirs always own the home and the equity is always yours. You are only borrowing money and accruing interest on the money that you borrow. You just don't have to repay that money until the time that you no longer live in the home and the home is sold and that time can come when you pass or when you choose to move yourself.
There is never a prepayment penalty so you can pay any or all of your reverse mortgage at any time. You need to review the Security Agreement though as payments have a specific order to which they will be applied. All prepayments have a specific order on the Note as to how they will be applied and go First to that portion of the balance which represents the payments made for Mortgage Insurance; Secondly to servicing fees on the loan, if any; Thirdly to that portion of the outstanding balance which represents accrued interest and Fourthly to the Principal Balance.
In other words, if you send in a prepayment, the amount will be credited to the first two items on the list above (many loans today have no servicing fees), and then toward interest. You cannot simply direct it to go toward "interest" if the mortgage insurance premiums have not yet been paid. The mortgage insurance has both the Up-Front and an annual accrual for renewal. The only way to eliminate one is to take a program in which the lender is willing to pay for it for you, which often comes at a higher rate on the Standard Program. The Up-Front portion on the Saver Program is so low that many lenders are willing to pay it on your behalf since the cost for a $300,000 property is just $30.00 as opposed to the $6,000 on the Standard Program.
Regardless of which program you choose, none of the premium is refundable, however, if you choose to refinance the reverse mortgage loan with a new reverse mortgage loan, you do not have to repay the portion of the up-front mortgage insurance premium that you have already paid. Here is a link to our recent post on repayments on the reverse mortgages repayments on the reverse mortgages
Hi Vince, We can only offer rates that are available in the secondary market. Unfortunately, since the number of reverse mortgages done is such a small number in comparison to the number of forward mortgages, the mortgage-backed securities originated and sold for this product is extremely limited. That does not allow lenders to get too creative or aggressive with the products as they cannot originate enough of the loans or sell enough of the securities. To make a long story short, I have a higher rate than the 4.5% available, but nothing lower at this time.