Keys To Choosing Your Reverse Mortgage Interest Rate

About HECM Reverse Mortgages

While there are proprietary reverse mortgages available, most reverse mortgages are HECMs or Home Equity Conversion Mortgages insured by HUD. HECM loans must be originated by a HUD-approved reverse mortgage lender. HECM loans requires counseling by a HUD-approved counselor. FHA loan limits apply. Check with your HUD-approved reverse mortgage lender to determine the loan limit in your area.

Interest Rates Available on HECM Reverse Mortgages

Fixed Interest Rate - Fixed interest rates are only available if you choose to take your equity in a one-time lump sum distribution. Interest rates change without notice, so contact a reverse mortgage lender to get a current quote on a fixed interest rate reverse mortgage.

Adjustable Interest Rate - If you choose to take your equity in any other way than a one time lump sum, you will have an adjustable interest rate. Adjustable rate mortgages can be tied to different indices and come with different margins. Compare the available indices and the margins offered by lenders (your HECM counselor can show you how to do this) and decide which option is best.

Comparing Indices for HECM Reverse Mortgages

As conditions change in the economy, different indices become more or less attractive to the consumer. At one time, the 1-year Treasury Bill was a very common reverse mortgage index. The constant maturity (CMT) index has also been popular. Currently, the London Interbank Offered Rate, or LIBOR, seems to offer the best deal to those seniors seeking a reverse mortgage. Add the index to the margin and see what rate results--that is what you'd be paying.

Ask your reverse mortgage lender for a TALC (Total Annual Loan Cost) disclosure on each of the loans available. The TALC disclosure helps you compare each option side by side to make an informed choice. It is also a good idea to spend some time researching how each rate is calculated and how it is likely to move in different phases of the economic cycle.

Why Your Interest Rate Matters

There is no monthly repayment of a reverse mortgage. The interest that accrues on your principal balance is added to the balance every month. Interest expense is normally the largest cost associated with a reverse mortgage, so the interest rate you choose affects both the loan amount and the overall cost of the loan.