Most people don’t know that there are actually two different interest rates when it comes to reverse mortgages.
- The Initial Interest Rate – Short term (1 month – 1 year)
- The Expected Rate – Long Term (10 years)
On fixed-rate Home Equity Conversion Mortgages (HECM), the expected rate is the same as the initial rate. However, with the HECM adjustable rate mortgages (ARM), which is most HECM’s, these rates are quite often different.
The initial rate is the rate you are charged once the loan is in place. It works just like any other interest rate in that you are charged interest on whatever the outstanding loan balance is at that time. You are not charged interest on any money that is not being used, such as funds set-aside in a line of credit or reserved for a monthly payment.
The expected rate estimates what rates are expected to do in the future and this determines how much money you may receive from the reverse mortgage loan.
If interest rates are expected to be high, then your loan balance would be expected to grow at a faster rate. This increases the possibility that the balance could surpass the value of the home which increases the risk that FHA may have to pay a claim from the mortgage insurance at the end of the loan.
If it’s expected that the loan balance will increase at a faster rate, FHA tries to protect itself by lowering the amount of money you can receive from the reverse mortgage.
A small increase in the expected rate of just 0.25% can reduce the amount of money available by $6,000 - $10,000 depending upon your age and value of the home. This is why we lock the expected rate at the time of the application. If the expected rate was not locked at the application on an adjustable rate mortgage, you could end up with less money when we close the loan if the expected rate increases.
However, the good news is that if the expected rate decreases while your loan is in process, even though it is locked, you can still take advantage of the rate reductions meaning that you can receive more money from the reverse mortgage. It is a no-lose situation for you.
But the even better news is that over the last 6+ weeks, the long term rates have dropped fairly significantly, meaning more money is available to you from a HECM reverse mortgage than what was available just 6 weeks ago.
By starting your reverse mortgage application now, you can lock in the lower expected rate and maximize the money and benefits available from the reverse mortgage but still be protected if rates drop even further.
This is the reason that I am telling everyone I know that now is a perfect time to apply for a reverse mortgage loan. Please call me for more information at 303-467-7821.