|Note Rate||APR||MIP Rate||2019 Lending Limit||Payment Options|
|Start Rate||Lifetime Cap||Index||Margin||MIP Rate||2019 Lending Limit||Payment Options|
|3.75%||8.75%||12 Month Libor||1.00%||.50%||$726,525||Line of Credit, Term, Tenure, Lump Sum|
|4.25%||9.25%||12 Month Libor||1.50%||.50%||$726,525||Line of Credit, Term, Tenure, Lump Sum|
|4.50%||9.50%||12 Month Libor||1.75%||.50%||$726,525||Line of Credit, Term, Tenure, Lump Sum|
|6.09%||9.09%||3 Month Libor||3.50%||N/A||$5,000,000||Line of Credit, Lump Sum|
Tip #1: If you are shopping for the best reverse mortgage interest rate, be sure to first compare the programs payment options explained in detail below. Many prospects first lean to a fixed rate but find the mandatory lump sum unattractive when compared to the flexibility of a line of credit option or monthly payment plans featured on variable interest rate options.
How Interest Rates Affect Your Available Loan
You may have heard of recent changes to the Federal Housing Administration-insured reverse mortgage program, the Home Equity Conversion Mortgage program.
The agency announced in late august that it would be making several changes to HECM loans that will impact borrowers- both in terms of how much they will pay to get a reverse mortgage, and how much they’ll be able to borrow.
One of the big changes is that the amount you will be able to borrow with a HECM loan depends largely on current interest rates.
The amount of home equity you can borrow is tied directly to the interest rate available at the time you get your reverse mortgage.
Just like in the “forward” mortgage market, your interest rate determines the amount of interest you’ll pay. But in the reverse mortgage market, the current interest rate also determines the amount you can borrow.
All HECM reverse mortgages use a specific table provided by the Department of Housing and Urban Development to determine loan amounts for borrowers. This amount is called the “principal limit.” The principal limit depends mainly on three factors: the borrower’s age, the home value, and current interest rates.
From home to home and borrower to borrower, every loan amount will be different. After October 1, the percentage of home equity that borrowers can access will range from around 27% to 75%. Older borrowers can access a greater percentage of home equity than their younger counterparts.
2019's Reverse Mortgage Principal Limit Factors
|Age of Borrower||Percentage of Home Value||Home Value $200,000||Home Value $400,000||Home Value $600,000||Home Value $726,525 (Current Limit)|
PLF tables source: https://www.hud.gov/sites/documents/august2017plftables.xls
Tip #2: Each Monday afternoon the expected rate updates (taken from the 10 yr. swap rate) and creates an adjustment to all HECM lenders software and their principal limit factors. When you compare lenders rates & fees, be sure to receive written quotes within the same calendar week, preferably Tuesday-Friday. This will give you the most accurate side-by-side interest rate comparison.
Reverse mortgage Fixed Rates
Payment options: Single lump sum disbursement.
Interest rate: Fixed rate for the life of the loan. The interest rate remains the same for the life of the loan but requires a single lump sum disbursement at the time of closing. If you are using the reverse mortgage for a new home purchase or are already taking most of your available funds at closing to pay off another mortgage balance you might find this plan the most appealing.
Reverse mortgage Adjustable-rates, or ARMs:
Payment options: Single lump sum disbursement, line of credit, term, tenure.
Interest rate: Annual adjustable with a periodical change of up to 2% with a lifetime cap rate of 5% over the start rate. Monthly adjustable option comes with a no periodical caps and a lifetime cap rate of 10% over the start rate. Generally, interest rates are slightly lower than with fixed-rate mortgages but offer greater flexibility with additional payment plans such as the open line of credit, term and tenure plans. The adjustable rate plans come as either a monthly or annual adjustable.
Choosing Fixed-Rate Vs Adjustable
You can choose a fixed rate, or an adjustable rate and fixed rates sound great, but they are what is called a “closed end instrument” and require the borrower to take the entire loan at the very beginning of the transaction.
For borrowers who are paying off an existing mortgage and need all their funds to pay off the current loan, this is no problem.
For a borrower who has no current lien on their property or a very small one, this would mean that they would be forced to take the entire eligible mortgage amount on the day the loan funds.
This might give a borrower $200,000, $300,000 or more in cash from the very first day that they do not need at the time and on which they are accruing interest.
This can also have an adverse effect on some seniors with needs-based programs. (Medicaid: Seniors on Medicaid and some other needs-based programs would impact their eligibility by having the sudden addition of the liquid assets)
A borrower who is planning on using only a portion of their funds monthly need not pay interest on the entire amount from the very start, eroding the equity unnecessarily fast.
An adjustable rate will accrue interest at a much lower rate at today’s rates but has a 10% cap and can go much higher if 2018’s rates continue to rise.
Adjustable Rates Offer Greater Flexibility
The adjustable rate programs do allow you more flexibility in how you can receive your funds. First option would be a cash lump sum. This is not advised on the adjustable product as a cash lump sum request is usually associated with fixed interest rates, however it is available. Second option would be a line of credit.
The Reverse Mortgage line of credit is not the same as a “Home equity Lines of Credit or (HELOC) that you can get at your local bank. The Reverse Mortgage line of credit grows in available on the unused portion and cannot be frozen or lowered arbitrarily as the banks can and have done recently on the HELOCs.
Third option is a monthly payment option which can be set over a specific period and then cease or as a “tenure” which would be a monthly payment guaranteed for life.
Fourthly, a homeowner could choose any combination of the three options listed previously. The adjustable rates are currently much more flexible to meet borrowers’ needs. One of the things that can determine the amount for which borrowers will ultimately qualify is the rate at which the loan accrues interest.
When the margins on the adjustable rates were lower and the fixed rate was higher, the adjustable rates gave borrowers more money in their pockets in the form of eligibility. Now, most borrowers who run the numbers receive more money on the fixed rate program.
This is extremely important to know if you are trying to get as much as possible to pay off an existing lien. It also means that the higher the margin, the less money the borrower will receive and the faster interest on the loan will accrue.
So, the thing to look for in a reverse mortgage here is the rate on a fixed rate or the margin on an adjustable rate that is being quoted.
Tip #3: An increase in future interest rates may not necessarily be a bad thing, especially for those with the line of credit plan as a rise in future rates are also matched in the guaranteed line of credit growth rate. E.g, if your interest rate rises by 1%, your LOC growth rate will increase by the same rate. The higher rates go, the larger your line of credit will grow!
About the Libor Index
LIBOR stands for “London Inter-Bank Offered Rate.” It is based on rates that contributor banks in London offer each other for inter-bank deposits.
In October of 2007, the U.S. Federal Housing Administration (FHA) ruled in favor of insuring ARM loans based on the one-year LIBOR index.
At the same time, HUD also ruled to allow the one-month LIBOR to be used for calculating adjustments to interest rates for monthly adjusting Home Equity Conversion Mortgage (HECM). Below is a chart of LIBOR rates for the last 10 years.
LIBOR loans normally have lower margin rates than CMT (constant maturity of U.S. treasuries). This is particularly helpful to senior borrowers since the CMT margin became increasingly less desirable when selling the loans in the secondary markets and the change helped insure the availability of the market for ongoing lending.
If you had an annual adjustable rate in January 2001 with a 2.50% margin your fully indexed note rate would have been 7.67% (+.50% MIP) for a total interest charge to your outstanding loan balance of 8.17%.
Note: That same reverse mortgage in 2001 with an open line of credit would have grown in availability by that same rate of 8.92% – Example: $200k Line of credit would grow in availability by $1,486.66 which then compounds month after month, year after year. Be sure to read more about this important line of credit growth rate.
Where we are now:
Index Rate Resource: http://www.wsj.com/mdc/public/page/2_3020-libor.html