The interest rates of an HECM reverse mortgage are computed by adding the interest rate index and a margin that is set by the lender.
Choosing the interest rate adjustment
Every HECM reverse mortgage carries a variable interest rate, but sometimes you are able to choose the rate, adjusting either monthly or annually. Annual adjustments typically have lifetime and annual caps which put a limit on the number of points they can increase by and offer a lower maximum total loan amount.
Adjustable rate reverse mortgage
An adjustable reverse mortgage has an interest rate that increases or decreases at the same time the market interest rate index changes. The two indexes currently used are the CMT (Constant Maturity Treasury known as the ‘T-Bill’ or ‘Treasure Bill’) and LIBOR (London Inter-Bank Offered Rate. The LIBOR is a popular alternative for lenders because it has an internationally focused index rather than US focused. Before 2007, all reverse mortgage programs had an adjustable rate and where being offered on a monthly, semi-annual or annual rate.
Fixed rate reverse mortgage
A fixed rate reverse mortgage is specific to a lender and not indexed to interest rates that are published. To calculate a current fixed rate, the lender of the reverse mortgage must provide a good faith estimate. The interest rate of a reverse mortgage is determined case-by-case because it is secured by the home itself and is backed by HUD. The rate should be lower than any other rate available in the average mortgage marketplace for FHA reverse mortgages. Within the last few years, interest rates on reverse mortgages have fluctuated between 3% and 5%. The real interest rate is calculated on one half of the percentage point higher than the quoted rate because the total of the rate includes the FHA’s continuing mortgage premium.
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