Interest Rates, Margins, Adjustments and Caps

Much like a home equity loan, a borrower can choose a line of credit that allows the choice of when to withdraw money and how much. Interest will accrue ,or be charged, only on the amount taken out. Interest rates are primarily based on the one year Treasury Bill index, although other options or indices apply. Added to the Treasury Bill index is a margin, which at times, is rounded to the nearest 1/8th percent. This becomes the actual interest rate. Interest rate adjustment periods vary as do interest rate caps.

One Year Treasury Bill (T-Bill): Treasury securities are government bonds issued by the United States Department of Treasury. The index used is the weekly average yield on the United States Treasury Securities adjusted to a constant maturity of one year.

One Month CD Index: Average secondary market certificate of deposit rates for one month.

Six Month LIBOR: LIBOR stands for the London Inter-Bank Offer Rate.

Margin: An amount added to the basic index, and then generally rounded up to the nearest 1/8th of a percent. The end result is the actual interest rate charged.

Caps on Rate Changes: Limits the movement of interest rate, either up or down, for the specified period such as one month, six months, or yearly. There is usually a “floor” or minimum rate identified.

Lifetime Rate Caps: The maximum an interest rate can increase over the life of a loan.

Annualized Growth Rate

An “Annualized Growth Rate” feature is available on many Reverse Mortgage loans. This growth rate is applied to the unused portion of a borrower’s line of credit, increasing the credit line balance over time. It’s similar to a savings account balance increasing due to interest earned.

EXAMPLE: A borrower obtains a $170,000 Reverse Mortgage in the form of a line of credit. $20,000 is used at closing to pay closing costs and home repairs, leaving $150,000 balance. Assuming no additional funds are withdrawn from the credit line, at an annualized growth rate of 6.500%, the line of credit balance grows to over $300,000 dollars in 12 years. The annualized growth rate applies to any unused credit line balance and greatly increases a senior homeowner’s borrowing power. On HECM loans the annualized growth rate is ½ percent higher than the interest rate charged on the loan.

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Loan Payout Options

There are five basic payment types for a Reverse Mortgage Loan. The payment type elected will impact the amount of money you receive.

LUMP SUM: Receive all cash proceeds at once, or in one lump sum.

Pros: Proceeds can be coordinated in preparation for estate planning or for a specific need.

Cons: There is no annualized growth rate benefit on unused loan balance since all of the available funds have been disbursed.

LINE OF CREDIT: A dollar amount of money available that can be drawn upon as the borrower sees fit.

Pros: You have the freedom to use the money when you need it. Depending upon loan type, annualized growth rate increases unused balance over time . Interest is only charged on the amount withdrawn (used).

Cons: If you need to write a check every month for expense needs, a monthly payment plus the line of credit would be a better choice.

MONTHLY PAYMENT FOR LIFE OR AS LONG AS YOU LIVE IN HOME:

Pros: Enhanced security knowing that you will be receiving a monthly check for as long as you occupy the home. Excellent option if you need more to supplement exisitng income to meet current or future monthly expenses.

Cons: Monthly payments are lower than for a fixed term. No access to cash if large expenses or repair needs arise.

MONTHLY PAYMENT FOR A SPECIFIED TERM:

Pros: Receive higher monthly payments because the term was specified (i.e. 5 or 10 years). Important to know if you plan to move from your home at a specified time in the future.

Cons: When the term ends, the checks will end.

COMBINATION OF ANY OF THESE OPTIONS ABOVE:

Pros: Monthly payments to better accomodate everyday expenses plus a line of credit for emergencies or unexpected costs like home repairs.

Cons: When you reduce the balance in credit line the amount of money that can be withdrawn at any given time is reduced

NOTE:  A reverse mortgage loan is becoming a popular choice  for purchasing a home. Additionally, except for a lump sum distribution, for most reverse mortgage loans, you can change your payment options and terms with your lender for a nominal fee.

Current Reverse Mortgage Fixed rates range btween 5.49% - 6.5%, while the adjustable rates are from 2.6% - 4%.

As the largest and most recognized reverse mortgage lender, Wells Fargo currently offers the lowest fixed reverse mortgage rate and a very competitive adjustable rate program. They also have been recognized as having perhaps one of the most dynamic reverse mortgage operations in the nation. Many seniors find  their reverse mortgage processing to be informative, comfortable and quick.

In terms of servicing the reverse mortgage loan after it has closed, Wells Fargo Home Mortgage maintains a servicing unit that is second to none. No call goes unanswered on their reverse mortgage platform.