Reverse Mortgage Rates... Margins Rise Again
Michael Branson (CEO ARMC) 3/26/09 11:42pm
I always have people asking me which option is better, a fixed rate or an adjustable rate for their reverse mortgage. Both have benefits and both have drawbacks. And what about now while the margins keep moving and since lenders just announced another round of margin increases. The answer I give the person asking the question is invariably “the one that is right for YOU”. And then we start to discuss their personal goals and what they intend to do with their reverse mortgage. But everyone needs to understand that margins just went up again and that affects all senior borrowers looking to get reverse mortgages.
I explain to the borrower that a fixed rate reverse mortgage is a closed end instrument, which means that they get their initial draw and then there are no additional draws. For borrowers who wish to take all their funds in the beginning to pay off a current mortgage, for other purposes, or for the HECM for purchase, this might not be an issue as they need to make a full disbursement at the very beginning anyway. However, for the borrower who wants a payment for life or a line of credit from which they can draw later, the only option available to them is the adjustable rate option.
For borrowers who intended to take all the funds in the beginning, they can choose either a fixed rate or an adjustable rate. Borrowers utilizing some needs based programs such as Medicaid cannot take all their funds at once and put them in the bank or they risk making themselves ineligible for those programs. All borrowers utilizing the adjustable rates are affected when the margins rise as they have been doing over the past 12 months and as they did again today.
So then the next question is; if you are going to take all the money up front, which would be the better option? Here again, it depends on you and your circumstances and your preference. Right now, the adjustable rate accrues interest at a lower rate than the fixed rate does, meaning the balance on the loan will not rise as quickly. And in the past a borrower could get more money with the monthly adjustable rate due to the fact that the fixed rates higher and the margins on the adjustable rates were lower.
However, with margin increases on the adjustable rate reverse mortgages, many times when we run the loan comparison, the borrowers actually have a higher benefit with a fixed rate than with the adjustable option. Also, the fixed rate will never increase through the life of the loan and the rate at which your interest accrues on the adjustable can increase - as much as 10% on the monthly adjustable program over the life of the loan.
With the changes in the pricing for reverse mortgages due to all the credit industry has undergone in the last year, borrowers must now lock their rates differently than in the past. Borrowers are now subject to signing all their disclosures, only to find out that the margins or the fixed rates increased in the marketplace before the loan can be submitted to underwriting and with that, the cash they planned to receive suddenly decreases. Will margins come back down any time soon?
No one can say for sure. But many borrowers who have been sitting on the sidelines “kicking the tires” and thinking about it have seen their values continue to drop and the margins continue to rise, some to a point where they could no longer get sufficient funds to pay off their existing mortgage. With the way margins have increased in the past 12 months, going up as much as 200 basis points (2%) and the way values have gone down during that same time period, margins may soon become the deciding factor on whether or not some borrowers qualify.
If you or a family member would like a complete, no-obligation personal analysis including amortization schedules and costs associated please call Toll Free (888) 801-2762 Ext. 1 or request reverse mortgage analysis