Many seniors are looking for a few extra bucks a month to help make ends meet. One of the best ways available for seniors to do this is by taking out a Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage.
So, how are interest rates calculated for a HECM reverse mortgage loan?
Interest rates for HECM reverse mortgage loan are calculated either on a fixed or adjustable rate. This depends on what loan program you want and what programs your lender has to offer.
To calculate the total Interest Rate charged to a reverse mortgage the formula is as follows: Margin + Index + Monthly Mortgage Insurance (Current market standard is 0.50%).
Still, you are probably asking how are interest rates calculated for a HECM reverse mortgage loan?
Well, mortgage insurance requirements will vary by loan situation. The margin is determined by your lender. In the past lenders used high margins around 1.5%. Fortunately today Reverse mortgage fixed loan rates have tended to be about 0.5% higher than traditional mortgage, or forward mortgage fixed loan rates. This is because lenders are commonly using smaller margins. 0.5% seems to be the current industry standard
So ultimately interest rates are calculated the same way for reverse mortgages that all other interest rates are calculated, in that it all comes down to the index. The most commonly used index or lenders across all lending programs is LIBOR or the London inter bank offered rate.
It is the index fluctuating day in and day out that changes the pricing for rates and what rates are readily available at no cost. To fully understand how interest rates are calculated for a HECM reverse mortgage loan, and all other mortgage loans in general one would have to study LIBOR (the worlds most active interest rate market) and how it works. Basically LIBOR is determined by rates that money market banks in the London market offer each other for short-term deposits. To learn more Google “How is LIBOR calculated”.
Related posts: