Reverse Mortgage Rates

There are two principal choices for a reverse mortgage. There is the Home Equity Conversion Mortgage, or HECM, which is the HUD approved and insured reverse mortgage. The other is a proprietary reverse mortgage which is a loan issued by a commercial lender who is not obligated to follow HUD guidelines. The rule of thumb is that you will usually be able to get more cash out of your home with a proprietary reverse mortgage, but that proprietary loans cost more both in closing fees and with the interest rate.

All HUD approved reversed mortgages – HECMs – have the same interest options. The loans are all adjustable rate mortgages (ARMs) and can be adjusted annually or monthly; the choice is the borrower’s. The index for a HUSD reverse mortgage is the interest rate on a one year Treasury note, or T-bill.

The margins for these loans are set by Fannie Mae, the quasi-private agency that purchases FHA loans and packages them for sale. For an annually adjusted rate the margin is 3.1%; for a monthly adjustment the margin is 1.5%. The annually adjusting loan cannot change more than 2% in any one year and is capped at an increase of 5% over the life of the loan. The monthly adjustment can be no more than 2%. The cap on these loans is usually 10%, since that’s the maximum that Fannie Mae will accept on loans it will purchase. While Fannie Mae has the option of changing these margins, it rarely happens.

The HECM loan program has substantial closing costs. There will be an origination fee, appraisal fee, monthly servicing fee, a mortgage insurance premium and ordinary closing costs and fees, such as title examination, title insurance, insurance, courier fees and loan origination fees. The big one- loan origination fees, or “points,” is limited to 2% of the loan’s statutory limit. The borrower is allowed to finance these fees with proceeds from the reverse mortgage. Questions on amounts? Visit our calculator section.

While the interest rates are controlled, the borrower still has a choice to make between the monthly and annual adjustment. The reverse mortgage that adjusts monthly will allow for a greater cash advance than the mortgage adjusting annually. While the cap on the monthly rate is far greater than on the annual rate, if the economy doesn’t go haywire the interest rate for the monthly rate will always be 1.6% lower than the annual option.

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