Generally, when considering a loan of any kind, one of the first pieces of information considered is the interest rate as it affects the funds available to you and the amount you will repay. In this respect, a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is no different than other types of financing: although the borrower is not required to make any monthly mortgage payments1, reverse mortgage interest rates impact the amount of equity the borrower can access and the interest that will accrue on the loan balance.
How Do Interest Rates Affect a Reverse Mortgage?
As with most financing options, the lower the interest rate, the more borrowing capacity you will have. Interest rates affect the reverse mortgage as follows:
- A lower interest rate will result in a higher calculation of the principal limit at the beginning of the loan. This means the borrower can access more home equity upfront and over the life of the loan.
- A lower interest rate will decrease the amount of money that will be added to the balance of the loan.
Since borrowers do not need to make monthly mortgage payments1 with a reverse mortgage, interest charges do not affect the affordability of the loan in the same way as they would with a conventional mortgage where higher interest rates equate to higher payments each month. However, for homeowners who want to access as much of their home equity as possible, a low interest rate is a vital factor in accomplishing their goal. Other factors such as borrower age and property value also affect how much of the home equity can be borrowed.
When is Reverse Mortgage Interest Charged?
Much like a conventional mortgage, reverse mortgage interest is charged on the amount of money borrowed. Unlike a conventional mortgage, a reverse mortgage does not require monthly mortgage payments on the principal or interest.1 Instead, the interest charges are added to the loan balance on a monthly or yearly basis depending on the type of interest rate the borrower chooses (fixed vs. adjustable). The loan balance plus interest will become due and payable when:
- The home is sold;
- The last borrower no longer occupies the property as his/her principal residence; or
- There is a default on property taxes or insurance.
Fixed-Rate Reverse Mortgage
The benefit of the fixed-rate on a reverse mortgage is that the borrower will know with certainty how much the loan balance will be after a period of time. The disadvantage to a fixed-rate reverse mortgage is that it only offers a lump sum as a disbursement option.
A fixed rate reverse mortgage may make sense for borrowers who anticipate using all or most of the loan proceeds right away. Some of the common reasons for getting a fixed rate include: using most of the loan proceeds to pay off an existing mortgage(s), or for financial transactions that require a large and immediate payment. Otherwise, it is usually not in the borrower’s best interest to have interest accrue on funds that are not needed right away.
Variable Rate Reverse Mortgage
Many borrowers are apprehensive about getting an adjustable rate loan. However, an adjustable rate reverse mortgage has the benefit of allowing the borrower more control over how and when to access the loan proceeds. An adjustable rate enables the borrower to configure how and when the loan proceeds are disbursed such as: a line of credit, tenure or term monthly payments, a small lump sum at closing, or a combination.
One of the unique features of an adjustable rate reverse mortgage is the line of credit growth rate2. Unlike a traditional home equity line of credit (HELOC), a reverse mortgage line of credit grows over time, giving the borrower additional borrowing capacity.
The unused portion of the line of credit will continue to grow over time even if the borrower’s home value depreciates, and the lender cannot make any modifications. The line of credit growth feature appeals to many borrowers who are uncertain about how long their retirement funds will last or who want to be prepared for unexpected financial events. The line of credit gives borrowers peace of mind knowing that the funds will be there when they need them most.
For both fixed and adjustable rate HECM loan options, the mortgage insurance issued by the Federal Housing Administration (FHA)3 protects borrowers from ever having to repay more than what their house is worth.
What Are Current Reverse Mortgage Rates?
The interest rate you get on a reverse mortgage will depend on the type of product you choose. The best way to find out what product and interest rate makes the most sense for your situation is to request a Free No-Obligation Eligibility Assessment by calling (800) 976-6211. A licensed loan advisor will determine if you meet the basic eligibility requirements, get a better understanding of your financial goals, and then recommend the best loan product for your needs if you meet the eligibility criteria.
Important Disclosures:
1 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2 Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.
3Federal Housing Administration (FHA) mortgage insurance premiums (MIP) will accrue on your loan balance. You will be charged an initial MIP at closing. The initial MIP will be .5% or 2.5%, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.