Everything Seniors Need to Know About Reverse Mortgage Rates

Published: 02nd February 2012
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As with any type of loan, a borrower’s interest rate will have a significant impact on his or her reverse mortgage. Reverse mortgage rates affect borrowers’ proceeds and payment options, as well as the overall affordability of the loan. Before pursuing a reverse mortgage, potential borrowers should make sure they understand reverse mortgage interest rates. This will ensure that seniors get the best deal possible on their loan.

Reverse Mortgage Rates: Fixed Vs. Adjustable Rates

Reverse mortgages are given either fixed or adjustable interest rates. Fixed rates are those that remain constant over time. Regardless of changes in the market, a fixed rate will neither increase nor decrease. Because of this, many consumers view them as safer than adjustable interest rates.

An adjustable interest rate is one that adjusts according to a certain financial index. The two indexes lenders use to calculate rates are the London Inter-Bank Offered Rate (LIBOR) and the Constant Maturity Treasury (CMT). However, because the LIBOR is an international index and typically lower than the CMT, it is substantially more popular. Borrowers who choose an adjustable rate will see their interest rate increasing and decreasing as the market fluctuates.

While fixed reverse mortgage rates sound safe, they do limit the payment options available to seniors. Borrowers who choose a fixed interest rate must receive their loan proceeds as a lump sum. Adjustable rates give borrowers several additional options. Proceeds on an adjustable rate reverse mortgage can be given as a line of credit or in fixed monthly installments. Because a line of credit will actually increase as the home appreciates, borrowers who choose this option sometimes receive more than if they had chosen a lump sum. Borrowers who choose monthly payments might also profit more over the life of their loan.

Understanding How Reverse Mortgage Rates are Calculated

As previously stated, adjustable reverse mortgage interest rates are based on a specific financial index. However, this is not the only factor that determines rates. Lenders also add a margin to this index. For example, if a loan is said to be an HECM LIBOR 300, it is a federally-insured reverse mortgage based on the LIBOR index with a 3% margin. If the index is 1.25%, the borrower would be given a 4.25% interest rate. The margin is the markup necessary to ensure that the lender’s operating costs are covered. Margins are fairly consistent amongst lenders and do not leave much room for negotiation. Unlike with other loans, a borrower’s credit score or assets have no bearing on the reverse mortgage rates they qualify for. This makes it much more difficult to request a lower rate based on eligibility.

Fixed rates, on the other hand, are not based on a specific index. While these rates also vary by lender, they are fairly consistent. To avoid confusion, borrowers who choose a fixed-rate loan will be provided with a Good Faith Estimate (GFE) that confirms their rate. The GFE will also explain all fees and closing costs associated with the loan. After receiving this document, seniors should approach their lender with any questions they have regarding unfamiliar or confusing fees. While the GFE is not a final document, it will give the borrower a good idea of how much they can expect to pay for their loan.

Fortunately for seniors interested in a reverse mortgage, reverse mortgage interest rates are at an all-time low. This means several things for borrowers. Borrowers are paying less in interest and enjoying larger payouts. Regardless of whether seniors choose a fixed or adjustable-rate loan, a low interest rate will help them get the most from their home equity.

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