Reverse Mortgage Rates
The following is an explanation of reverse mortgage adjustable rate calculations for the HECM and Home Keeper Reverse Mortgages.
With the HECM Reverse Mortgage there are two rates that are taken into consideration: the Expected Interest Rate and Initial Interest Rate. The expected rate is the 10-year Treasury bill plus a margin of 1.5 percent. The initial rate is the weekly average of the 1-year Treasury bill plus a margin of 1.5 percent.
A choice of interest rate options is an additional feature of the HECM loan. As a borrower you can choose either a Monthly Adjustable Rate or Annual Adjustable Rate program. Both of these rates are based on a 1-year T-bill rate, plus a margin.
Monthly Adjustable Rate: This rate is calculated as the 1-year T-bill rate plus a margin of 1.5 percent. The sum of the two becomes your Initial Interest Rate.
1-year T-bill + margin = Initial Interest Rate
So, with a T-bill rate of 4.5% and a margin of 1.5%, you have an Initial Interest Rate of 6%.
Each month on your loan anniversary date, the rate will be changed to reflect the rise and fall of the T-bill. This rate is capped at 10 percent over the initial rate at closing. So, if your initial rate is 6 percent, the interest rate of your loan cannot exceed 16 percent.
Annual Adjustable Rate: This rate is also determined at closing and will change on the anniversary date of the loan each year. The (current) margin is 3.1 percent, 1.6 percent higher than the monthly adjustment.
1-year T-bill + margin (3.1%) = Initial Interest Rate
As in the example above: 1-year T-bill is 4.5% + 3.1% margin = 7.6% Initial Rate.
The lifetime cap for the annual adjustment is 5 percent, half that of the monthly. So, if your initial rate is 7.6 percent, the interest rate of your loan cannot exceed 13.6 percent over the life of the loan.
In either case, future rate increases have no effect on payments the borrower receives or the principal loan amount, since this is determined upon the close of the loan. Conversely, a change in rates will affect the balance of the loan, which will grow more slowly if rates fall and more quickly if they rise.
In all, if there is little difference between the two adjustments you may want to consider the annual rate due to the lower cap. However, if you are looking to receive the most money possible then the monthly adjustable will typically be the better choice.
The Home Keeper interest rate is based on the 1-month CD rate, plus the (current) margin 3.4 percent. Again, the initial interest rate is calculated by totaling the two.
So, if the 1-month CD index is 3.5 percent + margin of 3.4 percent, you have an Initial Interest Rate of 6.9 percent.
Just as the HECM monthly adjustable is changed to reflect the changes in the T-bill, each month on the anniversary date, the rate of the Home Keeper will be changed to reflect the rise and fall of the CD index. This rate is capped at 12 percent over the initial rate at closing. So, if your initial rate is 6.9 percent, the interest rate of your loan cannot exceed 18.9 percent.
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