Reverse Mortgage Interest Rate
Edited by Michael Jensen
Related FREEandCLEAR ResourcesThere are two types of reverse mortgages: fixed rate mortgage and adjustable rate mortgage (ARM)- Your interest rate depends on the type of reverse mortgage that you select
- With a fixed rate reverse mortgage your interest rate never changes as compared to an adjustable rate reverse mortgage where your interest rate is subject to change and potentially increase over the life of the mortgage
The discussion below compares the interest rate for a fixed rate reverse mortgage to the interest rate for an adjustable rate reverse mortgage and outlines how you can potentially negotiate a lower interest rate when you a reverse mortgageThe interest rate for a fixed rate reverse mortgage is set and cannot change as long as you have your mortgageThe interest rate for a fixed rate reverse mortgage is determined by the lender and subject to negotiation with the borrower- The interest rate for a reverse mortgage is approximately 1.25% higher than the current market rate for a normal 30 year fixed rate mortgage
Borrowers should gather reverse mortgage proposals from three-to-four lenders to find the mortgage with the lowest interest rates and fees
Shopping your mortgage business and comparing lenders can save you thousands of dollars in interest expense over the life of your mortgageThe interest rate for an adjustable rate reverse mortgage can change, and possibly go up, over the life of the mortgageThe interest rate for an adjustable rate reverse mortgage is comprised of two components: the margin and the indexTo calculate the interest rate for an adjustable rate reverse mortgage you add the margin to the index- For example, if the the margin is 2.500% and the index is 1.000%, the interest rate for your reverse mortgage is 3.500%
The margin is a set interest rate amount that does not change over the term of the reverse mortgage- The margin is typically 2.0% - 3.0%
- The margin is determined by the lender and subject to negotiation with the borrower
The index is an underlying interest rate that can change over time. Lenders typically use the one month or one year LIBOR as the index for an adjustable rate reverse mortgage- Simply put, LIBOR represents the interest rate that banks charge each other to borrow money and changes with fluctuations in the economy
- The values for the one month and one year LIBOR fluctuate but are the same for all banks
- If you select a monthly adjustable rate reverse mortgage, the one month LIBOR is used to calculate the interest rate
- If you select an annual adjustable rate reverse mortgage, the one year LIBOR is used to calculate the interest rate
The interest rate for an adjustable rate reverse mortgage is re-calculated on a monthly or annual basis (depending on if you have a monthly or annual reverse mortgage) for the entirety of the mortgage and will change with any fluctuations in the index- If the index increases, the interest rate on your reverse mortgage increases and the loan balance increases faster over time because you are adding more interest expense to the loan
The interest rate for an adjustable rate reverse mortgage also has a life cap which limits the maximum increase in interest rate over the term of the mortgage- The typical life cap for an interest rate for an adjustable rate reverse mortgage is 5.0% which means the interest rate over the life of the loan cannot exceed the initial interest rate by more than 5.0%About the author
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