Reverse Mortgage Rates... Index + Margin = Your Money
Michael G. Branson (CEO ARMC) 8/14/08 10:06pm
The passage of HR 3221 will bring many welcome and positive changes to senior homeowners as they relate to reverse mortgages. However, there are other things happening in the marketplace that are not as welcome that can catch an unaware consumer or Loan Officer by surprise. Reverse Mortgages have seen some relatively recent interest changes, both with the introduction of a new index, the London Inter Bank Offered Rate (or LIBOR) and with up and down movement of the Constant Maturity Treasury (CMT) from the 1.50% margin that was once a standard 1.50% margin to margins of 1.00% and sometimes lower, to announcements this week of CMT margins now jumping to 1.75% or even 2.00% within the next few days.
The index and the margin are the two components that, when joined together, make up the final interest rate at which the reverse mortgage accrues interest. The index fluctuates as rates change and it is the “base” to which a set amount, or “margin” is added, the margin is constant and never changes once the loan is made.
Whether that index is the CMT or the LIBOR, you add the margin to the index and the total of the two is the interest rate that determines how much money a borrower will qualify for and how quickly the balance grows with the accumulation of interest. For example, if your index is 2.5% and your margin is 1.5%, your final rate would be 4%.
With the newer margins for CMT product going to 2%, your final rate would go to 4.5% even though the interest rates upon which your reverse mortgage was based had not gone up. To see a comparison of the two indices, graphs and history you can visit our Reverse Mortgages Rates Section where we update frequently.
It is very important to the senior homeowner who is applying for a reverse mortgage to know the significance of the change to the new higher margins for CMT based loans, as well as for the specialist who is serving them. The Federal National Mortgage Association (FNMA or Fannie Mae) has just announced that they have completely altered they way they will be purchasing reverse mortgages loans with the CMT index and that change goes into effect very soon. This can make a large change in the amount of money the borrower will receive.
For example, a borrower who is 74 years old in Orange County, California with a property worth $500,000 would receive a Principle Limit of $262,297 on a Home Equity Conversion Mortgage (HECM or “Heck-um”) with a 1.50% margin. With the new 2.00% margin the same CMT HECM Reverse Mortgage would only give the borrower a Principle Limit of $246,334 (different areas and ages will be affected differently).
In this example, that would be nearly $20,000 less the borrower would receive solely due to the higher margin and that really comes into play when the borrower is paying off a current lien and needs as much money as possible. The LIBOR index tends to run a bit higher, but with the lower margin available today of .75% and the same 74 year old borrower would also receive a Principle Limit of $262,297.
Some lenders will be offering a LIBOR index, some may only be offering the CMT index, but it pays to know the difference and how it affects you or your loved ones. If you are talking to a lender who will only offer you a CMT index with a 1.75% of 2.00% margin, you owe it to yourself to see the other options available to you and how they may put more money in your pocket now, or save you money in the long run with a lower interest rate with a lower margin option on the LIBOR index.
Why are interest rates important when choosing the best reverse mortgage?
1.) The lower the expected interest rate, the maximum amount of proceeds are made available to the homeowner. (Principle Lending Limit)
2.) The better the index performs over time can relate to thousands of dollars of retained equity throughout the life of your reverse mortgage, meaning more inheritance for your children / heirs.
Have a question about Interest Rate Options? If you or a family member would like a complete, no-obligation personal analysis please call Toll Free (888) 801-2762 Ext. 1 or request reverse mortgage analysis