Reverse Mortgage Rates Compared

As you move forward with your reverse mortgage loan application, you will be asked to decide between interest rate options. Should you choose a fixed interest rate or an adjustable interest rate? Following are several points to consider when making that choice.

A Fixed Interest Rate

• Only available if the loan proceeds are taken upfront in a one time lump sum distribution. If your intention with the new reverse mortgage is to take a regular monthly payment, or have an available line of credit, then you would have to have an adjustable interest rate.
• Interest begins to accrue on the entire available balance from the time of the funding. This could mean that more interest is paid on this type of arrangement .
• The lump sum option works well for a senior who currently has a mortgage on the home and is mainly interested in no longer having to make a monthly mortgage payment. The reverse mortgage proceeds would be used to pay off the existing mortgage, ending the monthly mortgage payments. The proceeds are used upfront, therefore the fixed rate option would be optimal.
• Normally, a fixed interest rate starts out higher than an adjustable rate. Only if the adjustable interest rate increases over time could the fixed rate option cost less (given the same principal balance). If the adjustable interest rate averaged lower than the fixed rate over time, the fixed rate would actually cost more. Since no one has a crystal ball, and the economy can change very quickly, it is anyone's guess what interest rates could do.
• Typically, since all of the money is taking upfront, the senior receives less money with the fixed rate option. If you goal is to receive the maximum amount of money, the fixed rate option will probably not work for you.

An Adjustable Interest Rate

• If your goal is to get the maximum amount of money from your home's equity, you will most likely choose an adjustable rate mortgage. Because the interest rate on an adjustable normally starts out lower, it can mean greater available equity for the new loan.
• If you have decided that you would like a regular monthly payment for life or for a specific term, your only choice would be an adjustable rate. The same is true if you decide to take your proceeds in the form of a line of credit to access at will. Sometimes a combination of a regular payment and an available line of credit is possible. In any of these cases, you would choose an adjustable interest rate.
• Adjustable rate reverse mortgages are based on an index and margin to calculate the amount of interest paid. Margins have increased over the last year. Typically, margins for an adjustable rate reverse mortgage were about 1.500% and sometimes as low as 1.00%. Due to economic changes, they have increased in some cases to 2.00% or more.However, indexes have hovered near one percent--so the fully-indexed rates are still quite low.
• In the past, most adjustable rate reverse mortgages were tied to an index associated with the sale of U.S. Treasuries, such as the 1 Yr Treasury index or the CMT (Constant Maturity Treasuries). This is changing with the introduction of products indexed to the LIBOR (London Inter Bank Offerings Rate). As of August 31, 2009, Fannie Mae will no long buy CMT indexed reverse mortgages. Fannie Mae has said that in order to build liquidity in the reverse mortgage market, the LIBOR index should be used and this change will help securitize and standarize reverse mortgage loans.