Time for Action, Reverse Mortgage Rates on the Rise
Admin 1/22/11 1:12am
Reverse Mortgage Rates have remained low for a very long time, both on the adjustable rate products and on the fixed rate loans. Starting in early 2010, when rates really dropped and the loans were selling really well for lenders in the secondary market; lenders were paying more and more of the borrowers' closing costs on many of the programs. Loans that one time cost borrowers as much as $20,000 or more could be found with few or no closing costs during this time as lenders and originators were passing these savings on to borrowers. But ever since October of 2010, reverse mortgage rates have been on the rise.
At first, the increase was almost negligible. Also, HUD lowered the floor on their calculation to 5% which meant that borrowers actually received more money on many of the products at the lower rates than they did in the past. This was very helpful to borrowers because HUD also cut the amount of money borrowers received under the program at this time, but with the lower rates, lender paid fees and the lower Rate Floor, borrowers actually received more money even with the lower Principal Limits. But as reverse mortgage rates begin to rise, borrowers will begin to feel the HUD cut in Principal Limits. Once the rates creep up over 5.5% (the old floor) borrowers will receive less under the program than they did prior to the October 4, 2010 cut.
As the index which determines how much money a borrower receives on the adjustable rate programs rises, the amount of money that the borrower receives goes down. The figure that actually determines the cash in the borrowers' pockets is the Effective Interest Rate, which is based on the 10 year LIBOR (London Interbank Offered Rate) and that index is at 3.41% as of January 21, 2011. With a margin of 2.25% or 2.75%, the Effective Rate jumps to 5.66% or 6.16% and that really cuts into the amount of proceeds a borrower receives. For example, a 75 year old borrower with a $400,000 home and with all other fees being equal, would receive a little over $20,000 less at 2.25% margin than he or she would at a 1.75% margin at the same rate. A 2.75% margin will net the borrower over $38,800 less than the 1.75% assuming all other fees are the same. The difference for that same borrower between 5.06% and 5.25% is over $12,000 straight from the proceeds the borrower receives. (Visit the Federal Reserve to view current Swap Rates)
To make matters a bit tougher, the securities have not been selling with the large premiums that they had been in the recent past in the last several sales for reverse mortgage backed securities. That may not sound like the borrowers' problem, that the lenders don't get as much money when they sell the securities but what that means is that the lenders cannot afford to pay borrower's costs like they did and that makes it a double hit to borrowers in this rising rate market. Not only do borrowers receive less money as rates rise, they also have to pay more of their fees with fewer lender credits to help pay them so that's even less money they will receive in the transaction.
one knows for sure what mortgage rates will do in the future. Different economists have differing views and
each support their positions with their facts and figures. There are also
factors beyond anyone's control or foresight that have affected rates in the
past that are beyond prediction that could always change things in a hurry. For
that reason, playing the market and trying to speculate when the best time to
get a loan based on what you think rates
will do at some date in the future is always risky. Any borrowers who felt that
they would wait just a little longer last November/December have already seen
lenders paying fewer fees, reverse mortgage rates rise since that time and
benefits decrease. If you plan of
getting a reverse mortgage in the near future and are one of the ones who believe
that rates will increase still more, then there is no time like the present to
get your reverse mortgage before benefits go down further yet. This is especially true if you need a higher credit
line, monthly payment, or payout to pay off an existing mortgage.