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We have had such low rates for so long that we have all come to take them for granted. We had borrowers call back on proposals that they received as much as a year prior to their second call in some instances and the numbers had not changed…but that is all changing now! Interest rates are rising and it started slowly even before the other day when the Federal Reserve announced that they could curtail their bond buying program which sent rates higher.
When the Fed does begin scaling back its bond purchases (and everyone knew they had to at some point so it was always a “when” and not an “if”), loan rates will go even higher. This is not to say that rates are headed back to the 18% range that we saw in September and October of 1981, but even a modest increase has a very large effect on reverse mortgage borrowers.
One of the factors that goes into the HUD calculation for determining the amount of money borrowers will receive under the program is the interest rate. There are two interest rates on every reverse mortgage that borrowers need to be aware of. The first is the Accrual Rate and the second is the Expected Rate. On a fixed rate loan, the accrual rate and the expected rate are the same. However, on the adjustable rate loan, the expected rate is not the same.
The accrual rate uses the 1-Month LIBOR index and adds your margin (i.e. 2.50%) to the index to determine how much interest will accrue on the outstanding balance. The expected rate uses a higher index, the 10-Year LIBOR for calculation purposes as that is a much more stable indication of what rates may be expected to be over a longer period of time – but this rate is also higher since it is a longer index.
There is a point, when going down, at which a lower rate will no longer get a borrower any more money under the program. This is commonly referred to as the floor. The floor is 5% and rates, both initial and expected, have been below 5% for so long that most borrowers have not been affected by the interest rate on the program for quite some time.
Now, the expected rate on anything over a 2.625% margin will give the borrower less money at closing. Also, since HUD eliminated the Fixed Rate Standard Program, even borrowers who really want a fixed rate have had to turn to the Standard LIBOR Adjustable Rate program whenever they need more money to pay off current mortgages, buy new homes, etc. than they can get from the Fixed Fate Saver Program.
On face value, that may not sound too bad as there are still plenty of margins available at 2.625% or less. However, it does do several things. Firstly, it takes away the lender’s ability to give a borrower a slightly higher 2.75% margin and then credit the borrower more money toward their closing costs.
Borrowers who needed these credits to close their loans and eliminate forward mortgages may now find themselves short to close. Higher rates will hinder the ability of lenders to offer lower cost loans through paying fees for borrowers on all options. It also means though that as rates creep upward, the amount available to all borrowers will begin to erode. The examples below show the amounts available to a borrower born in June of 1945 on a $400,000 home at various interest scenarios. As you can see, it doesn’t take much of an increase to start eating away at available funds:
As you can see by the numbers above, with less than a 1% increase in rates, the borrower would receive over $41,000 less money under the program. For borrowers just getting a line of credit with no immediate need for the money, this may not be an issue. For those paying off other loans, this may make all the difference in the world in whether or not the loan will work for them.
Combine rising rates with upcoming HUD changes to the program and many borrowers will find themselves no longer able to utilize the program. Unfortunately, the borrowers who will get the greatest “sticker shock” from the change in benefits are those who have been contemplating the move for quite some time, may have even gotten several proposals from different companies but never began the process and therefore, never locked in the expected rate anywhere by starting an application (an application and receiving a Case Number locks the Expected Rate for 120 days).
Those borrowers who get applications dated on Monday, June 24th and after when the new LIBOR rates are posted need to pay close attention to the figures as the increases to the rates that should be evident by then will affect any loans with Expected Rates that are now over the floor, bringing those borrowers less money in their reverse mortgages than they may have seen in previous proposals.
The experts at All Reverse Mortgage® are here to answer your questions. If you are interested in learning more about the current interest rate environment and how it affects you please call us Toll Free (800) 565-1722 or request a quote.
- Reverse Mortgage Expected Rate; Key to the Principle Limit
- Understanding Reverse Mortgage Principle Limit & Maximum Claims
- HUD principal Limit Factors (spreadsheet download)