One of the key questions that always surrounds any reverse mortgage is how much money you, as the borrower, will be able to draw from the loan.
The amount of money you can get from the proceeds of a reverse mortgage is primarily based on two important factors: your age, and the loan’s interest rate and margin.
Typically, older a borrower is, the more money he or she can receive in proceeds. By that same token, when the interest rate is lower, generally there is more money available to borrow.
The higher that the loan’s margin is, the lower the interest rate will need to be in order to increase the maximum amount of money a borrower can receive from a reverse mortgage.
The actual note rate on a Home Equity Conversion Mortgage (HECM) loan that you’ll want to keep an eye on is called the initial interest rate (IIR), which is the actual interest rate charged at the beginning of the loan and calculated by adding the index and the margin together.
So, in this article, we’re going to be going over a few of the different factors that surround the reverse mortgage margin, and what these elements all mean for you.
- What is the index?
- What’s the margin?
- What’s LIBOR?
- How do these things affect me?
- What should I ask my loan officer, and how can I find more information?
You might naturally be asking yourself exactly what are the index and the margin, two individual elements that will dictate your reverse mortgage initial interest rate (IIR). So, to start with, here are the two elements that combine to make up that very important part of your loan.
What’s the index rate?
The index is a base interest rate that serves as a kind of foundation for the initial interest rate (IIR) of your reverse mortgage. It also acts as a kind of tide that determines the floor for the IIR, meaning that if the index goes up, then so will the IIR.
What is a reverse mortgage margin?
The margin is the interest percentage that is added on top of the index by the lender, which provides the full IIR for your reverse mortgage.
The margin is not adjustable, which means that after your loan is originated, the margin will stay the same for the duration of the loan regardless of any changes to the index.
There is no index or margin for a fixed-rate HECM loan because the IIR is set for the life of the loan, so these elements apply only to the more popular variable-rate HECM loan.
What is LIBOR Rate?
The indices used for the variable-rate HECM is often the 1-month LIBOR and the 1-year LIBOR. LIBOR stands for London Interbank Offered Rate and is the rate of interest that banks use when lending money to each other in London, England’s wholesale money markets.
In the United States, the LIBOR is used as a standard financial index in capital markets and is usually published in the Wall Street Journal.
How do these things affect me?
You’ll definitely want to pay very close attention to the rates provided by the reverse mortgage lenders as you’re shopping around.
These rates play an extremely important part in determining how much money you could receive from the proceeds of your reverse mortgage loan and even how much equity will remain in your home at the end of the loan’s life before it is repaid.
The total amount of the interest rate can also be affected by factors such as the amount remaining on your forward mortgage (if you have one), a financial assessment which determines your ability to keep up with insurance and maintenance costs and the appraised value of your home.
Basically, at the end of the day, you will be able to receive more money for your home when both the margin and index is low, which translates to a low IIR.
What is the current reverse mortgage adjustable rate?
The current reverse mortgage adjustable 12-month libor rate is 3.5% including the index value of 2.0% and a margin of 1.5%.
What types of adjustable reverse mortgage rates are there?
Presently HUD offers either a 12-month libor or 1-month libor rates. The 12-month libor rate adjusts annually where a 1 month adjust monthly.
Is there a lifetime cap on adjustable rate reverse mortgages?
The lifetime cap rate on a 12-month libor is 5% over the initial start rate. The lifetime cap on a 1 month libor is 10% over the initial start rate.
Are there any periodical caps on adjustable rate reverse mortgages?
On a 12-month libor the maximum periodical adjustment is 2% up or down. The 1-month libor has no periodical adjustment and can go straight to the lifetime cap at any time.
How does a reverse mortgage margin affect the rate?
The lenders margin is what is charged on top of the index value to calculate the fully indexed note rate. E.g., if the margin is 1.5%, and the current index value is 2.0% you will have a fully indexed note rate of 3.5%.
Are all reverse mortgage rates and margins the same?
No. Contrary to what some believe, HUD does not control the interest rate or margin on HECM loans. Lenders set their own margins, so it is advised to shop around and find the best combination of margin and closing costs to suit your needs.
Is the margin on a reverse mortgage fixed?
Yes. The margin is fixed for the life of the loan. The variable is the index you choose whether that be a 12-month libor or 1-month libor.
Questions to Ask Your Loan Officer, and Finding More Information
You should most definitely ask any loan officer you’re thinking of engaging into a reverse mortgage transaction with about the specific details of their rates, since it is the rates that directly affect how much upfront cost will be built into the loan proceeds, which also will determine how much money you’ll be able to bring home after engaging in the reverse mortgage.
While looking around for information, you can also take advantage of ARLO™, the All Reverse Loan Optimizer, which can help you to shop around for the best rates and products to find one that fits your own financial situation best.
It’s also a good idea to talk with your trusted friends and family while deciding if a reverse mortgage is a good fit for your personal financial situation. That way, they can advise you on what your best path forward could be in funding your retirement years.
Every individual borrower can have a very different set of guiding circumstances. Those closest to you can probably offer more personalized advice before you sign on the dotted line.