How the Reverse Mortgage Margin & Libor Rate Works

June 10, 2024

Michael G. Branson Edited by

Cliff Auerswald 8 comments

Table of Contents

• Understanding Your Reverse Mortgage: Key Factors

• What is the Index?

• What is the Reverse Mortgage Margin?

• What is the LIBOR Rate?

• How Do These Factors Affect Me?

• Margin FAQs

• Questions to Ask Your Loan Officer

Understanding Your Reverse Mortgage: Key Factors

One of the most common questions about a reverse mortgage is how much money you, as the borrower, can receive. The amount you can get depends mainly on two factors: your age and the loan’s interest rate and margin. Typically, the older you are, the more money you can receive.

Lower interest rates also mean you can borrow more. A higher loan margin means the interest rate must be lower to increase the amount you can receive from a reverse mortgage. The important rate to watch is the Initial Interest Rate (IIR). This rate, which applies at the start of your loan, is determined by adding the index and the margin.

In this article, we’ll explain these factors and what they mean for you, including:

What is the index?
What is the margin?
What is LIBOR?
How do these affect me?
What should I ask my loan officer?
Where can I find more information?

What is the Index?

The index is a base interest rate that serves as a foundation for your reverse mortgage’s initial interest rate (IIR). If the index goes up, so will the IIR.

What is the Reverse Mortgage Margin?

The margin is the interest percentage added on top of the index by the lender, which provides the full IIR for your reverse mortgage. The margin is not adjustable, meaning it stays the same for the duration of the loan regardless of any changes to the index. Fixed-rate HECM loans don’t have an index or margin because the IIR is set for the life of the loan, so these elements apply only to variable-rate HECM loans.

What is the LIBOR Rate?

The indices used for variable-rate HECM loans are often the 1-month LIBOR and the 1-year LIBOR. LIBOR stands for London Interbank Offered Rate, which is the rate of interest that banks use when lending money to each other in London’s wholesale money markets. In the U.S., LIBOR is a standard financial index used in capital markets and is usually published in the Wall Street Journal.

How Do These Factors Affect Me?

As you shop around, pay close attention to the rates the reverse mortgage lenders provide. These rates are crucial in determining how much money you can receive from your reverse mortgage and how much equity will remain in your home at the end of the loan before it is repaid.

Other factors affecting the total interest rate include:

The amount remaining on your forward mortgage (if you have one)
A financial assessment of your ability to keep up with insurance and maintenance costs
The appraised value of your home

When the margin and index are low, you will receive more money for your home, resulting in a low IIR.

Margin FAQs

What is the current reverse mortgage adjustable rate?

The current reverse mortgage adjustable rate as of 6/11/2024 is 6.87%, including the index value of 5.12% and a margin of 1.75%.

What types of adjustable reverse mortgage rates are there?

As of 6/11/2024, there are monthly and annual adjustable rate options. The current index available in the market is the CMT (Constant Maturity Treasury). Margin options available are lower on the monthly adjustable options.

Is there a lifetime cap on adjustable-rate reverse mortgages?

The lifetime cap on an adjustable-rate reverse mortgage is either 5% or 10%, depending on the product option. It is the maximum percentage that the rate can ever increase above the start rate at the time of loan closing.

Are there any periodic caps on adjustable-rate reverse mortgages?

As of 6/11/2024, there is no periodic adjustment cap, and the rate could increase to the lifetime cap at any time.

How does a reverse mortgage margin affect the rate?

The lenders’ margin is charged on top of the index value to calculate the fully indexed note rate. For example, if the margin is 1.75% and the current index value is 5.12%, you will have a fully indexed note rate of 6.87%.

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 shopping around and finding the best combination of margin and closing costs to suit your needs is advised.

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 a monthly or annual adjustable.

Questions to Ask Your Loan Officer

How is my interest rate determined?
What is the current index rate?
What margin will be applied to my loan?
How will changes in the index affect my loan?

For more information, speak with your loan officer or explore additional resources to understand how these factors impact your reverse mortgage. ARLO™ recommends these helpful resources:

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Have a Question About Reverse Mortgages?

Look no further. Michael G. Branson, our CEO, brings a wealth of knowledge directly to you. With a robust 45-year tenure in mortgage banking and 19 years dedicated solely to reverse mortgages, he's the expert you want on your side.

Post your question in the comments below and anticipate a personalized response from Mr. Branson himself, typically within one business day. He's here to illuminate all angles of reverse mortgages, ensuring you're equipped with the knowledge to make informed decisions. Take this opportunity to gain insights from a seasoned professional.

8 Comments on this Article

Aruna C.
April 7th, 2021

Hello Arlo,
What is the max interest rate on these reverse mortgages? And how long will it take to get funded once approve for a reverse mortgage process?
Reply to Aruna
- Michael Branson
  April 7th, 2021
  
  Hello Aruna,
  
  You need to look at the loan you are being presented. Some have lifetime caps rates of 5% over the start rate and some have 10% life caps.
  And as I stated, they are based on the start rate of the loan so while most loans never go up to the maximum rate, the maximum your loan could rise to would be that rate in your agreement. That is one of the reasons borrowers need to be aware of all the terms of their loan, not just one or two of the initial fees.
  
  The time required for the funding is dependent on each loan as well. If there are no special conditions that your property needs or you need to meet, the loan may be closed as quickly as any other loan.
  Your lender will require you to meet all underwriting conditions before they issue loan documents and almost all loan approvals come with some conditions that borrowers need to complete before the loan can close.
  It is unusual for the loan to come out of underwriting needing nothing to close the loan transaction and then that timeframe is affected by how long it may take for you, an appraiser, your title company or some other third party to supply the needed documentation.
  But otherwise, once all information has been received to meet all underwriting conditions, you have the same general time constraints in that it usually takes a day or two to review things, loan documents must be drawn and that means that lenders will need to decide with your closing agent and notaries as well as make considerations for any current document orders they have ahead of yours.
  If your transaction is not a purchase, there is a mandatory right of rescission for all transactions, reverse or forward that means the lender cannot close the loan for 4 - 5 days after you sign your loan documents to allow you time to review everything and decide if you want to proceed.
  This means that there is at least a week with weekends and federal rights of rescission alone so it is safe to say with even the most efficient of lenders, it will still be 7 - 9 days and some lenders will take longer.
  Reply to Michael
Sergio S.
January 23rd, 2020

What are the current growth rates with the mortgage insurance factored into it
Reply to Sergio
- Michael Branson
  January 29th, 2020
  
  Hello Sergio,
  
  Each growth rate is set by the borrower's terms on their loan. The growth rate is equal to the interest accrual rate plus the MIP (mortgage insurance premium) renewal rate.
  So, for ease of explanation, if your interest is accruing at 3.00% and your MIP renewal rate is .5%, the growth on the unused funds in your line of credit is 3.5%. that growth rate changes yearly as your interest rate changes.
  Remember, the growth rate is money being made available to you, it is not interest being paid to you. Again, for ease of explanation, if you have a line of credit of $100,000 you do not touch and your growth rate is 3.5%, your available line of credit at the start of the next year is approximately $103,500. The growth you experience in the next year would start based on the balance of $103,500 times the interest rate plus MIP for that year.
  
  As stated, the growth funds are additional funds being made available to you, it is not interest you earned. If you never use them, you do not accrue interest owed on them and you do not have to repay them. However, if you do draw them from the line at some point, they will accrue interest just like any other borrowed funds.
  Reply to Michael
Roger C.
October 12th, 2019

On the 1-year libor index what is the range of the margin? From high to low.
Reply to Roger
- Michael Branson
  October 12th, 2019
  
  Hi Roger,
  
  This is pretty much set according to the current market. I have seen them as low as 1% at times and as high as 3.5% in some markets. Currently (and it is subject to change daily/weekly) I think most are hovering around 1.5% to 1.75% and that allows the lender to often help with the borrower's fees. To check on any given day, please feel free to check today's rates and margins, see what is available and at what costs to see what works best for you. There is never any pressure and no obligation, so it never hurts to look!
  Reply to Michael
Darrell Miller
September 16th, 2019

Is the margin the maximum % the our rate can be raised on a rate change date ?
How often can the rate be changed ? I am scheduled to close tomorrow on reverse mtg., with iir of 3.049 % and margin of 1%. Cap rate is 8.049%. But I see in the fine print that my 1st rate change will be Jan.2020 with max increase of 2% at each rate change date. Am I wrong on the margin ? Is 2% rate increase right/typical/appropriate ?
Reply to Darrell
- Michael Branson
  September 23rd, 2019
  
  Hello Darrell,
  Every adjustable rate loan, for forward or standard loans as well as reverse mortgages, have an index and a margin that when added together determine the rate at which the loan will accrue interest at the fully indexed accrual rate.
  Loans, especially forward mortgages, can begin accruing interest at a rate less than the fully indexed rate and that happens when there is an introductory rate that is less than an amount totaling the index plus the margin. For example, if your index is the one-year LIBOR index and that rate is 2.5% and your margin is 1%, your fully indexed accrual rate would be 3.5%.
  If your initial rate is 3.25% though, that would just indicate that you have a lower introductory rate and your rate would move to the new index plus margin at the first change date subject to the interest rate caps on the loan. Adjustable rate loans almost always have some degree of change at the interest change dates, even if very small up or down, so a slight difference doesn't mean that there will or will not need to be a change anyway.
  There are two sets of caps that the interest can increase. The first is the interim (or annual in the case of a 1-year ARM) cap. This was the 2% you referenced. Your interest accrual rate can never increase by more than 2% over the previous year's accrual rate, up to the life cap of the loan, regardless of what the index (the LIBOR index) does during that time.
  It can also go down if the index goes down. The life cap (the 8.049%) is the maximum the rate can ever get to over the life of the loan should rates continue to rise and the 1 Year LIBOR index plus 1% would total 8.049% or more.
  Based on that information, your first-rate change can go no higher than 2% over the previous rate of 3.049% if the rates increase between now and the first change date but could stay the same or even go down. Assuming the worst-case rate scenario, the rate could then go up to 5.049% if rates were to go way up, then go to 7.049% and then to 8.049% but never any higher even if rates continue to rise.
  If they go back down after that, you would benefit from the lower rates because every year on the rate change date, the lender will look at the current index (the one year LIBOR) add your margin of 1% to determine the rate for the coming year (subject to the caps, of course).
  For current rates please visit: https://reverse.mortgage/rates
  Reply to Michael

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