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Interest rates are an important part of the overall costs associated with a reverse mortgage or any mortgage. When you are looking at rates for a reverse mortgage, there are multiple factors you will need to consider and understand. First, you need to determine what initial interest rate will be right for you. This will either be a Fixed Rate Reverse Mortgage or an Adjustable Rate Reverse Mortgage. We will discuss these options a little further below. In addition to the Initial Interest Rate, you will also need to understand the Expected Interest Rate. All these factors will determine the program which will be right for you and ultimately how much money you will be eligible for through a reverse mortgage. This is where you will see differences among various companies offering reverse mortgages. We have compiled the costs here – Reverse Mortgage Costs
Understanding Interest Rates
Initial Interest Rate – This interest rate will be the rate you are charged on the monies you borrow. When you have a reverse mortgage, the monies you borrow are the monies you stick in your pocket, and not necessarily the total amount of monies available to you. This will also be based on whether you have a fixed rate or adjustable rate reverse mortgage.
Expected Interest Rate – This is the rate used in the calculation to determine the percentage of equity available to you through a reverse mortgage. Do not confuse this with the rate you are going to be charged after your loan has closed. The expected rate will only be a factor at time of application and/or closing. When this rate is higher, the percentage calculated is lower. When this rate is lower, the percentage calculated is higher. HUD does have a floor limit set for this rate of 5.0%. What this means is, if the expected rate is 5.0%, you are eligible for the maximum amount of money based on your age and home value. If the rate goes lower, a higher percentage will not be available. It is important to understand what your expected rate is in order to maximize the monies available to you.
Credit Line Growth Rate – This is the rate applied to the unused line of credit (only applicable to the adjustable programs) and it is 1.25 percent higher than the initial rate. It is important to understand how the credit line growth affects your reverse mortgage as this is an important planning strategy for reverse mortgages. Many homeowners will establish a line of credit, which allows them to borrow what they need, when they need it. The unused portion will grow allowing access to additional equity over time.
Fixed Rate Reverse Mortgage - Fixed rate reverse mortgages have not always been available for reverse mortgages. It is only over the last couple years that we have seen fixed rate reverse mortgages become more popular. The main benefit to a fixed rate is that the rate will not change during the term of the loan. Currently, fixed rate reverse mortgages require you to take a lump sum distribution at day one. You will not be able to establish a line of credit, or other payment options, which are features only available through the adjustable rate reverse mortgage.
Adjustable Rate Reverse Mortgage – The rate of an adjustable rate reverse mortgage will be determined by an Index and a Margin. Currently, adjustable rate reverse mortgages are based off of the LIBOR index. Where differences will occur among companies will be in the margin they add onto the index. Ultimately, this is how much profit companies want to build into the loan.
What is important to understand with margins, is that the margin will also be added to an index to determine the expected interest rate. If a company is giving you a higher margin, not only will you be charged a higher interest rate, you will also be eligible for less money. This is where working with a company like Senior Equity Financial is an advantage. Since we work with multiple lenders, we have the ability to get the best interest rate and most money available to you.
Not only are Interest Rates important in determining how much money is available to you, but you also need to factor in Closing Costs and the Monthly Service Fee. All these will factor into how much you qualify for, and we want to assure you that we are maximizing your eligibility.
With Senior Equity Financial, your needs come first. Just call us at (800) 261-8507.