When you apply for a reverse mortgage, should you choose a fixed rate or an adjustable? Which index is best?
Choosing a Reverse Mortgage Rate
Reverse mortgage rates can be either fixed or adjustable. If adjustable, you may have to decide on an index and margin. Following is information you will need to get the best reverse mortgage rate.
Fixed Reverse Mortgage Rate
You can only get a fixed reverse mortgage rate if you choose to take all of your equity up front in a lump sum distribution. Usually the lump sum option is used to pay off an existing mortgage and end monthly mortgage payments. It can also benefit someone looking to pay and consolidate medical bills or high interest debts. If you take all of your equity proceeds up front, you will be paying interest on the entire balance from the beginning. This option could cost the most in interest.
Adjustable Reverse Mortgage Rate
Most seniors seeking a reverse mortgage are looking for monthly equity payments. For this reason, most reverse mortgages have an adjustable interest rate. Adjustable interest rates are calculated using an index, margin, and rate caps.
Index - An adjustable rate mortgage is tied to an index. The most common indices used in reverse mortgage loans are the Constant Maturity Treasury (CMT) and the London Interbank Offered Rate (LIBOR). Indices are published regularly in major newspapers such as The Wall Street Journal. You can also easily find them online.
Margin - A fully indexed rate is the index plus the margin. A margin is the profit a bank requires to make the loan. For example: The current 1 Yr LIBOR is 0.92%. If the reverse mortgage lender adds a 3.00% margin, the fully indexed rate used to calculate the interest due would be 3.92%.
Rate Caps - There are limits on how quickly an adjustable rate mortgage can move. The longer a rate is fixed, the higher the caps are likely to be. If a reverse mortgage rate adjusts annually, the cap may be 3.0%. If it adjusts monthly, the cap might be 1%. There is usually a maximum a reverse mortgage rate as well -- either an interest rate or a percentage over the start rate. For example if a reverse mortgage rate starts at 3%, and the lifetime cap is 8%, the highest its interest rate could ever be is 11%.
Plan on spending time with your reverse mortgage lender and your HUD counselor to discuss reverse mortgage rates. It is very important that you understand how your interest rate may change so that you can estimate how much the loan can cost you in interest.
Total Annual Loan Cost
Compare how a fixed reverse mortgage rate and an adjustable reverse mortgage rate differ in interest cost using a Total Annual Loan Cost (TALC) disclosure. Reverse mortgage lenders are required under The Truth In Lending law to provide potential borrowers with a TALC early on in the application process.
Renee has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.