Reverse Mortgage Radio Show 12-07-17
On today’s show Bruce will introduce some different terminology relating to interest rates that you may not be familiar with, but need to know. Listen to the show and learn how interest rates impact the amount you qualify for on your reverse mortgage.
How Interest Rates Impact Reverse Mortgages
Why don't you break down honey, and give me just a little bit of that money?
Bruce Simmons: Good afternoon, and thank you so much for joining me today on Reverse Mortgage Radio. I am your host, Bruce Simmons. Today we're going to be talking about interest rates. We've talked about them a little bit before, but I'm going to put a little bit different spin. We might dig a little deeper, but hopefully we're not going to bore you too much about this. Hopefully, you'll learn something. Interest rates are very important with all loans, any loan. Nobody wants to pay more interest than what they're supposed to, or what they have to, I guess.
Interest rates with reverse mortgages, more than any other loan, determine the amount of money that you can get on a reverse mortgage. On a regular mortgage, I know if your interest is high, your mortgage payment is going to be higher so you might not qualify for as large of a loan, because you can't afford the payment.
With reverse mortgages, there is no payment. How does it work? We're going to dig into that here in just a little bit. Before I get into that, let me tell you, if you have any questions about anything you hear me talking about today, feel free to call me. Call me directly at (303) 467-7821. (303) 467-7821 is my direct line. You can always reach me ... well, not always reach me, but you can leave me a message. I'm the only one that gets those messages on that phone, and I definitely will return your call.
Before we get too deep into it, too, I always like to start off ... there are a lot of new listeners, people that come and go. Sometimes they listen today, and they don't listen for a few more months. A reverse mortgage is an FHA-insured loan. Actually, I should say not all reverse mortgages are FHA. I've always said that. They're really not. The FHA mortgage program is called the Home Equity Conversion Mortgage. HECM, is what we call it. Home Equity Conversion Mortgage.
99% of the loans reverse mortgages made are FHA, HECMs, but not all of them are. Technically, I'm not being totally accurate in that respect by saying reverse mortgages are FHA. The vast majority of reverse mortgages are FHA-insured under that HECM program. What they do is they allow you to convert a portion of the value of your home into tax-free money that you never have to re-pay as long as you live in your home.
You do have to continue to pay your property taxes and homeowner's insurance, as well as maintain the home and live there. Reverse mortgages are only for your primary residence, keep that in mind. As long as you or your spouse live in the home, you can continue to live there and never ever have to make a mortgage payment as long as you pay your taxes and insurance, and maintain it.
What happens is you are still charged interest. There's that word. You're charged interest on a monthly basis. It gets added on to the loan balance. Every month you get a statement in the mail, and you see your loan balance getting larger and larger and larger. Now, you're not making a payment though. What you're doing is that equity that you have in your house is being used to absorb the interest that gets added on to the loan balance, if that makes sense. Hopefully, it does.
That's what a reverse mortgage is. You can take money from the reverse mortgage and do whatever you want with it. You could pay off an existing loan that you're making payments on, you could set up a line of credit, you can receive a monthly income from it, you can do any combination of those. It doesn't matter. A lot of people will set up a standby reverse mortgage so that it's just there just in case, and things of that nature.
What I want to talk about today is the interest rates. Not just the interest rates, but how the interest rates impact you as the potential borrower, because that's what you're doing, you are borrowing money with a reverse mortgage. It is a loan, and you're charged interest. Actually, that's right. We talked about this before, didn't we, Marie? My producer, Marie, about why is it that you're being charged interest on your own money.Marie: Yeah, it didn't make sense to me at first.
Bruce Simmons: That's a good point. I should touch on that real quick. You're technically not borrowing your money. Your equity in the house is being used as security for a loan from somebody else. It's like if I loan you $1,000.00 and you say, "Here is the title to my car," and I hang on to the title of your car, and if you don't pay me back, then I can take your car. Well, it's my money I'm loaning you, and that's why you're paying interest on it. I expect $1,200.00 back, or whatever it might be.
It's not technically your money that you're taking out, it's your equity you're using as security for the loan. That's how it works. I want to talk to you today about how the interest affects you, whether you're considering getting a reverse mortgage, or you already have one. Let's start off ... if I get too deep, Marie, you tell me, okay?
Marie: All right, I will.
Bruce Simmons: You let me know if I start-
Marie: If my eyes start to glaze over.
Bruce Simmons: Exactly, yes. Basically what happens is there's three choices with interest rates with a reverse mortgage. You can choose a fixed interest rate, so it will never change as long as you have the loan. You can choose a monthly adjustable rate, meaning the interest rate can change from month to month. You can choose an annually adjusted interest rate. I'm going to focus mostly on the annually adjusted rate, because that's what most people choose in this market right now.
A monthly adjustable rate is not really the best bet in a potentially increasing rate environment. The rates are probably going to be going up. They have been trending upward over the last few months. On an annually adjusted rate, it can only adjust one time per year. The interest rate can change a maximum of two percentage points per year, or five percent over the life of the loan. If you start out at four percent, the most it could change next year, no matter what the Federal Reserve does, is it could go from four percent to six percent. The next year could go to eight, and then nine. That would be the worse case scenario. It would take you three years to get there.
Marie: So, the annual adjustable rate is sort of more stable?
Bruce Simmons: Yes, that's a good way to put it. Thank you.
Marie: I'm following you so far.
Bruce Simmons: Good job. The monthly adjustable rate can change by up to 10 percent over the life of the loan, and there's no annual cap. Theoretically, from one month to the next, it could increase by 10 percent.
Bruce Simmons: Yes, that's what most people say. When we anticipate the rates going up, the monthly adjustable makes more sense. Now, let's put that aside. There's some terminologies that I want to ... I don't know if terminologies is a word-
Marie: We'll pretend it is.
Bruce Simmons: Okay, thank you. I want to touch on some words that you might not be aware of. Number one, you hear me say the LIBOR, the London Interbank Offered Rate. We're going to dig a little bit deeper into that, and then talk about what it is and how it impacts you. Something called a margin. The margin is the difference between two set points. Also, something called the expected rate. That's a term that's specific to reverse mortgages.
Marie: We're going to be so smart by the end of the show.
Bruce Simmons: Oh man, I'm telling you. Hopefully, you have your notebook ready, your pen and paper. First of all, what is the LIBOR interest rate? Well, you may have heard me say before, it's the London Interbank Offered Rate. What is that? Well, basically like you think of New York as the hub for the largest stock market in the world: The New York Stock Exchange. London is the home to the largest money market in the world. If banks want to do business internationally, they tend to trade and borrow money from one another in the London money markets. That's why it's based in London.
The London Interbank, meaning they loan money to each other. Basically, it's the primary index used on adjustable rate mortgages in the United States. It's the interest rates that banks pay to borrow money in the London market from one another. That's how it works. In an index, index is what your rate is tied to. For example, back in the day when people used to have home equity loans that were tied to prime ... they had prime interest rate. Yeah, I'm prime plus two. That would be my rate. Whatever prime rate is, that's the index, plus two ... the two is the margin.
In that situation, let's say the primary was four plus two would put it at six. You would be charged six percent interest. Prime is four, the two is the profit, if you will, to the bank. That's not really accurate, but it's close. That's what the bank is earning when they loan you that money. They borrow it at say four, they loan it to you at six. The difference is the margin. The margin stays the same throughout the entire life of the loan. The index can change. If the index goes from four to six, your rate is going to go from six to eight, because the margin is still always two.
That's kind of the way with reverse mortgages. Right now, the index ... I'm going to round off, just to [inaudible 00:10:04] it's like 1.9 something is the ... and there's different indexes within the LIBOR. There's one month LIBOR, there's three months LIBOR, six month, one year, 10 year, all these. We're going to talk about the one year LIBOR, is what it's called.
Marie: When your interest rate changes, that's determined by people in London?
Bruce Simmons: Yeah, the index. Not people in London, but people who trade in London, if you will.
Bruce Simmons: It's not the Brits saying, "Hey, we're going to raise those Americans' rates." No.
Marie: Okay, we won't blame anybody in particular.
Bruce Simmons: Okay, yeah. It's just the way the market is. It's a kind of free market, it's not really free, but sort of. We're going to base it on the one year LIBOR index, because you're taking an annually adjusted rate. If you chose the monthly adjustable rate, it would be based on the one month LIBOR index. Typically, speaking, the longer between changes, the higher the rate is going to be. A one month LIBOR index is lower than a one year LIBOR index.
The other rate I'm going to talk about is what's called the expected rate. That rate is specific to reverse mortgages, and what it is its something called the 10 Year LIBOR Swap. I'm not going to get into too much detail, because personally I don't completely understand Swap. Basically, it's the trading of cash flows. I printed up kind of a definition. An interest rate swap is an agreement between two parties in which one stream of future interest payments is exchanged for another based on specified principle amount. Basically, it's kind of what they think the rates might be over the next 10 years.
Marie: Like a prediction.
Bruce Simmons: Kind of, but not really. You don't have to know that much detail, but the expected rate based on the 10 year LIBOR swap, is what we use in the industry to determine how much money we're going to loan you. The higher that rate, the lower amount of money you can qualify for. What we do is the margin is affected on both the one year LIBOR, which is the rate you actually pay, and the expected rate, which is the rate we only use for calculation purposes.
If you call me today, and you say, "Bruce, I want to get a reverse mortgage on my $300,000.00 home." I'll look at it at the amount, and I say, "Okay, based on a two percent margin, that might equal a four percent interest rate for the one year LIBOR, and it might be a 4.6 rate for the expected rate." Basically, the amount you're going to qualify for is based on 4.6, but the rate you're actually going to be charged once you have the loan in place is four percent.
If I were to charge you a two and a quarter margin, or a two and a half margin, the amount you qualify for would be less, and the interest rate you're being charged would be more.
Marie: But, you don't get to personally make those decisions. They're kind of already established.
Bruce Simmons: Well, you can. Yes, I do kind of make those decisions.
Marie: Oh, okay.
Bruce Simmons: It depends. Not me personally, but from company to company. They can vary. That's why it's so important if you're shopping around ... I wanted to point to this out. The expected rate is what is used to determine the amount you can get. You call me today and you say, "Okay, how much can you loan me?" I give you a figure. I can loan you $100,000.00, you call someone else, and they say, "Well, I can loan you $90,000.00." You say, "Well, Bruce could offer a lot less." The biggest question you need to ask people is what is the margin. If the rate goes up, if the index, the expected rate, goes up from one week to the next, you call me one week, and you call somebody else another week, we might have the same margin. But, because the margin went up, this other company can't offer you as much money because they're basing it on the index for that day. The expected rate is higher, even though the margins are the same.
You call me back, and you get mad at me because I say, "Yeah, I can only you $90,000.00 now," you say, "Well, you told me last week you could loan me $100." Well no. What happens is with the expected rate, the way it is set up is it can change technically from day to day, but usually a lot of lenders will put out their rates on a Tuesday. Every Tuesday it changes. Typically, it's later in the day. Then, once you start the application, that rate gets locked. The amount of money you can qualify for is then locked in. You're not going to get any less, as long as the house appraises for what we think it will.
Say you have a $300,000.00 home. I can loan you $150,000.00 today. We do the application, we lock it in. We lock the expected rate, not the actual rate you're being charged. We just locked the one the day of the application. The rate goes down next week. You call me and say, "Hey, I saw I can get $3,000.00 more now." Well, no. Not yet. If the rate stayed that way until we closed, yes, we can offer you a little bit. You're locked on the high side, so the rate is not going to go any higher, so you're going to get at least that 150 that I told you would. When the rate goes down, if it goes down the time that we close the loan, then you'll get that additional money.
If it goes down and then back up, now the rate is above what I told you while we're in the processing. You're not going to get the lower amount, you're going to get the actual amount that we talked about at the application.
Marie: I can see how it's important to have a loan officer who, first of all, knows what they're doing. Second, that you can trust. When the numbers change, you know there's a good reason.
Bruce Simmons: Hopefully, once the application starts the numbers aren't going to change unless the value comes in lower. I got a terrible appraisal just yesterday on a poor customer in Boulder. In Louisville, you can't imagine. This house is a beautiful home, and the appraiser ... I don't know, was a bad appraisal, and we're going to be arguing it. Very rarely does that happen any more, but that's the other thing, too. I took a call from a lady who called me. She found me online, and she said, "This other company I'm doing business with, they're out of state and they're just so busy." This was in October she called me, right after the change. She applied in September when everybody ... there was a ton of business, everybody was so busy.
Her appraisal came in really bad, and she had all these facts as to why it was such a bad appraisal. I said, "You really need to talk to your loan officer to have them dispute the appraisal with the appraisal management company. The appraisal management company takes what you give them, and they go back to the appraiser and say 'Hey, this customer is disputing the fact that you only came in with a value of 500 when they think it's worth 550,'" or whatever the case may be.
The loan officer just stopped calling her back. She wouldn't call the lady back. Well, okay because the appraisal didn't come in, we didn't have enough to pay off the loan, so I can't help this lady, goodbye. She had so much ... she was so busy doing other things, the loan officer was a woman in another state. She was so busy trying to close the loans that she knew she could close, she wasn't worrying about this customer over here in Colorado, who got a screwy appraisal, and that's the reason. It's important to deal with people who understand it, and people who are local, too.
Marie: That's where you'll actually go to bat for somebody, and be their advocate.
Bruce Simmons: I've done it before.
Bruce Simmons: Yes, I have. I've done it multiple times. Not so much recently, I did have to do it twice, so far, in 2017. We didn't get the full amount that the customer thought, but we got close. In one case, it actually changed it more than I've ever seen. They did improve it by like $15,000.00.
Marie: Oh, wow.
Bruce Simmons: Yeah, now the customer thought it was about $40,000.00 short, but I thought she was kind of stretching the value, anyway.
Marie: That could mean the difference between not being able to do a reverse mortgage, or being able to do a reverse mortgage.
Bruce Simmons: Exactly, yeah. Or, having to bring cash to the closing and not. If you have to bring money out of your pocket ... if we can't loan you enough money to pay off your existing mortgage with the reverse mortgage, if you want to do the reverse mortgage, you have to bring the difference in to closing. You might have to write a check for $10,000.00, where it might be $2,000.00 if we can get that appraisal lowered, or maybe none. I should say corrected.
I kind of got off topic there, but by the way, too, you can visit me online at reversemortgageradio.net, reversemortgageradio.net and you can hear a podcast of this show, as well as all my previous shows. You can see video testimonials, you can see me trying to explain some of these things in short video snippets, but also you can call me directly at (303) 467-7821. If you have questions about this, I'd love to talk with you. If you have an existing reverse mortgage and you have a question, call me. I know a lot of people don't service their reverse mortgage ... there's a lot of loan officers that don't service their reverse mortgage. It just kind of drives me crazy, because these people ... they look at it as a transaction. They're a transactional lender. This is the loan, see you later, bye-bye, don't call me.
I give you my card at the closing. I attend the closing. I make sure that you know ... I tell everybody whether it's next week or next year, or 10 years down the road, you call me if you have any questions. You're still my customer, even though I'm not the one that actually sends the statements to you. I tell everybody that. It's funny, and I'm way off topic here, but there is one thing ... I had a guy that I went out and met with ... this must have been in 2012 or 13, and he ended up going with another loan officer. He called me a month later or so and said, "Can you represent me at the closing?" I said, "I'm not an attorney."
Marie: Yeah, if you didn't do the loan, why would you be there at the closing?
Bruce Simmons: Exactly. I said, "You should have used me to begin with if you don't trust this other loan officer." He said, "Well, I just thought I'd want somebody with an impartial opinion." I said, "No, I'm not going to do that for you." Then, probably less than a year later he called me with a question and said, "There's this question I have on my loan here," and I tried to answer it but I said, "You really need to call your loan officer." It was something relating back to the original loan.
Marie: How funny, he must have just connected with you more than with the one he picked.
Bruce Simmons: I guess. I said, "I wish you would have called me, but I can't help you with this right now." Anyways, it went on and on, too, with that guy. I've got the strangest people sometimes that I deal with. I love my customers, the people I actually work with are just great. We talked about the LIBOR, the one year index, the LIBOR index, the margin, which is just the difference between the index and the rate you're actually charged once you have the loan in place.
Marie: And the margin is sometimes different from lender to lender.
Bruce Simmons: That's right. When you're shopping around, you call one lender. Ask them, they'll quote you the amount of money that you can get, maybe closing costs, and we'll talk about closing costs next week, actually. Also, to the rate. You'll want to know what rate am I being charged. Typically, when I'm talking to somebody, I don't get into the expected rate a whole lot on the phone, especially. When I meet with them in person, I'll show them this is the rate that determines the amount of money you can get.
You really want to ask them margin. They're not going to tell you that over the phone, typically. Ask them, "What margin are you quoting me, here?" They need to tell you. If they're not willing to tell you, don't do business with them.
Marie: Yeah, that's kind of a good [inaudible 00:22:29] test to know to ask that question.
Bruce Simmons: Yeah, and they should be willing to tell you the closing costs over the phone as well. It's so much easier. When somebody calls me and they say, "Hey, I want to talk to you about a reverse mortgage," I ask them very general questions: What is it that you're hoping to accomplish? Is this the house you plan to stay in? Find out if it's a condo. I want to verify it to make sure that it is an approved condominium, FHA approved. Things like that. Then, I would prefer to sit down with somebody in person. I'll come out to you and meet with you, but if you say ... some people say, "Well, just email me the numbers," it can be a little overwhelming looking at these numbers. A lot of times, people don't understand what they're looking at.
I will, if somebody wants me to. If they want me to go over it with them on the phone ... a lot of times when I email it, I'll say, "Please call me when you have time to go over these, and I'll explain everything," just to make sure there's no misunderstandings. You'll want to compare ... get a couple of different quotes. The LIBOR, the one year index, is the index that your margin is added to to determine your rate that you will be charged once the loan is in place.
Right now, for example, if you have a two percent margin and let's say the index is two, then your rate is four.
Marie: That's the kind of math I can handle.
Bruce Simmons: Yeah, two plus two. There you go. That's me, too. Honestly, math was not my strong suit in school. I got to 10th grade geometry, and I got a D in it. I said, "I'm done with math. I don't like it." This kind of math kind of makes sense to me. I can figure it out. The expected rate is the one that's used to determine before you apply for the loan, the amount of money you can get. Once you start the application and that expected rate gets locked, so then you're locked in, at least at that. As long as the value comes in what we're talking about, you'll at least get that amount of money.
If the rate goes down at the time that we're closing, you could get more. It kind of just protects on the negative. It gives you the option, or possibility I should say, to get more money at the closing. One other thing, too, to remember about reverse mortgages is as the rate goes up, or down, it doesn't affect you directly. You're not making mortgage payments. If you had an existing loan, and you had an adjustable rate and the rate went up by a percent, that's going to dramatically impact the amount you pay every month. That's what a lot of people don't like about adjustable rate mortgages. Look back at the financial crisis. All those people lost their homes because they had adjustable rate loans. A lot of them did, but they were making payments.
You don't have to make payments with a reverse mortgage as long as you live in the home, you pay your property taxes, your homeowner's insurance, and maintain the home, you never have to make a mortgage payment. Your loan only comes due when you permanently leave the home.
Marie: Yeah, so you're not writing checks out of your pocket for these interest payments.
Bruce Simmons: That's right. The equity in your house is paying for it. If the value goes up over time, there is a good chance you could have more equity in your house, after you do the loan than before, depending on the appreciation rates we've seen in the last few years. It's very realistic that ... I do a number of quotes for people. Depending on how much money you take out, how you use the money an all that. All those things factor into your overall decision. We want to keep all that in mind when you're shopping around.
Ask people for the margin. What is the margin on the adjustable rate loan. It's an annually adjustable rate, right? What's the margin? Two? Two and a quarter? Two and a half? Whatever they may charge. Is that negotiable? You may say, "Hey, can I negotiate that down?" Some people might say, "Yeah, I can offer you a lower margin, but I have to charge a higher origination fee." That's a possibility, and maybe it's worth it to you in that respect.
Those are the things you want to consider, but please do visit me on my website at reversemortgageradio.net, reversemortgageradio.net, or better yet, just pick up the phone and call me, (303) 467-7821. I look forward to hearing from you. Hopefully, you will call me and ask me as many questions as you can. I would love to go over all this with you.
My name is Bruce Simmons, and I'm the host of Reverse Mortgage Radio. I really, really appreciate you joining me today. I hope you have a great afternoon. Bye.
Call reverse mortgage specialist, Bruce Simmons of American Liberty Mortgage directly at (303) 467-7821 to begin drawing equity from your home. Bruce will come to you anywhere in the front range for an in-person, no obligation consultation. Learn more about reverse mortgages and watch testimonial videos on reversemortgageradio.net. NLMS Number 409914. Regulated by the Division of Real Estate.