What Is A Reverse Mortgage Interest Rate?Like most other loans, if you take out a reverse mortgage, you’ll pay an amount of interest to your lender in exchange for the use of funds they provide. Reverse mortgage interest is one of several costs incurred when using this type of loan. The Department of Housing and Urban Development provides a detailed rundown of the fees and charges of a HECM:
- Mortgage insurance premiums (MIP): At closing, you’ll pay a 2% MIP for Federal Housing Administration (FHA) mortgage insurance. Over the life of your loan, you’ll also be charged an annual MIP that equals 0.5% of your outstanding mortgage balance.
- Third party charges: You may pay third-party charges due to closing costs from third parties, including appraisal, title search and insurance, inspections, surveys, credit checks, mortgage taxes, and other fees.
- Origination fee: This fee compensates your lender for processing your reverse mortgage. Lenders may charge the greater of $2,500 or 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. Origination fees are capped at $6,000, so you won’t pay any more than that, and lenders may not charge the maximum amount.
- Servicing fees: Reverse mortgages come with servicing fees; servicing refers to the maintenance tasks your lender must complete throughout the life of your loan. These activities could include sending you regular account statements, ensuring you receive your loan proceeds, and checking that you’re keeping up with your loan requirements. Service fees depend on the type of interest rate you have, which leads us to our last HECM cost.
- Interest: It’s this last piece of the puzzle that we’ll deal with in today’s post. Like other types of loans, you’ll pay interest on the funds you receive from your lender. However, interest payments are added on to the principal of the loan, and the payment timeline for reverse mortgage interest is different from that of traditional loans.
- Your home is sold
- All borrowers move out of the home
- All borrowers have passed away
- The loan goes into default if you fail to comply with loan terms or fail to pay property taxes and homeowner’s insurance
What’s the Difference between a Fixed Interest Rate and Variable Interest Rate?Reverse mortgage interest rates may be fixed or variable. Let’s take a closer look at both options:
Fixed reverse mortgage ratesIf your reverse mortgage has a fixed interest rate, that means your interest rates won’t change over the life of your loan. Fixed interest rates are typically only available if you opt to acquire a lump sum payment, which means you’ll receive all funds when closing your loan, after paying off any existing mortgage or liens on your property. Many homeowners opt for this type of payout when they want the security of knowing their interest rate won’t go up or down. How are they calculated? Fixed interest rates reflect the current economic conditions and are typically determined by investors and financial institutions. Actual fixed rates available to borrowers will vary and are dependent on loan factors. If you’re interested in a fixed rate reverse mortgage, our team can help you determine your potential interest rate.
Adjustable reverse mortgage ratesIf you’d like to receive the funds of your reverse mortgage in incremental payments, you may opt for an adjustable reverse mortgage rate. This means you can withdraw money when you need it (but there may be limits on how much you can withdraw at a given time). Adjustable loans may adjust on an annual or monthly basis. An adjustable rate can offer more flexibility, as a borrower can choose different methods and frequency of fund disbursement. How are they calculated? Adjustable reverse mortgage rates are dependent on two factors: an index and a margin. The sum of these equals your adjustable interest rate.
- Index: The index is a standard rate that fluctuates based on market interest rates; interest rates can increase or decrease based on whether the index goes up or down. Lenders currently use a published financial index called the London Interbank Offered Rate (LIBOR). LIBOR is an average value of the interest rate, which is calculated based on estimates submitted by top global banks every day.
- Margin: After determining the interest rate index, lenders consider their margin. This is an interest percentage that a lender adds to the index—essentially, this is the money a lender makes on the loan.
What are rate caps and rate floors?There are two additional factors that can affect your adjustable interest rate over the life of your loan. Rate caps are designed to set a maximum rate that your loan can incur. For example, if your rate cap is 10%, but your fully-indexed rate increases to 10.50% at some point during the life of your loan, you will only be charged 10%. Additionally, your lender may assign a rate floor, which determines how low your rate can drop. If your rate floor is 3%, you’ll always pay that amount, even if the sum of your index and margin drop below it.
Why Do Reverse Mortgage Interest Rates Matter?It’s important to learn about reverse mortgage interest rates for several reasons:
- The lower your rate, the less interest you’ll pay over the life of your loan. This can affect how much equity is left when your loan matures.
- A lower interest rate may mean you have more funds available to you.
Because you don’t need to make a monthly payment with a reverse mortgage, interest charges won’t affect the affordability of your loan in the same way they would with a conventional mortgage, in which higher interest rates translate to higher payments every month.
Our team of loan professionals can help you determine what your reverse mortgage interest rate will be.
A reverse mortgage loan could be the financial tool that helps you live The GoodLife in retirement. Talk to one of our helpful representatives today and discover whether or not a reverse mortgage is right for you or click the link below to get started on the application process.