What are the interest rates on a reverse mortgage?
With reverse mortgages you have a choice of either a fixed rate or an adjustable rate depending on how you choose to receive the funds and which program you want.
The benefit to the fixed rate is obviously that the rate is set and can never go change. However, this choice limits your options of how you receive the money from the reverse mortgage.
With the fixed rate option, you have to pull all the money that is available out in one lump sum. This can be a problem if you don’t need it all right now or you want to set up a monthly payment plan (where you receive money every month from the reverse mortgage), or want to set up a line of credit. Neither of these options are available with the fixed rate program.
Also, HUD limits the amount of money that you are allowed to withdraw during the first 12 months of the reverse mortgage, so you may be receiving less money with the fixed rate program than you would otherwise get by choosing an adjustable rate.
The bottom line with the fixed rate is that it works great if you have a big mortgage that you are paying off with the reverse mortgage proceeds and there is not a lot of money left over.
The adjustable rate for reverse mortgages follows an index (see the glossary page for the explanation of what an index is), called the “London Inter Bank Offered Rate” (LIBOR). This rate can change up or down on either a monthly basis or an annual basis depending on what program you choose.
If you choose the annually adjustable rate, the rate can change one time per year and a maximum of two percentage points (2.00%) up or down. It can change no more than five percentage points (5.00%) above or below the start rate over the life of the loan.
For example, if your rate was 3.875% when you took the loan out, your rate could not go any higher than 5.875% on the first annual adjustment. In the worst case scenario, it would take a minimum of three years to increase to the maximum rate of 8.875%.
The monthly adjustable rate can change every month and has no annual cap, so theoretically, it could increase by ten percentage points (10.00%) in one month. Of course this has never happened. Also since it can go up quicker than the annually adjusted rate, it can also come down quicker.
In a nut shell, when rates are low and expected to increase, an annually adjustable rate is probably best. If the rates are high and expected to come down soon, then a monthly adjustable rate might be in your best interest.
Lastly, I’d like to remind you that you are only charged interest on the money that you have actually used. If your loan balance is only $10,000, that is all you are charged interest on.
Also, you should be aware that as the rate goes up or down, it does not affect you directly. If you had a traditional mortgage and your rate went up, you’d have to make a bigger mortgage payment to cover the increase. But since there are no mortgage payments on a reverse mortgage, and increase in the rate only means that the loan balance is increasing a slightly faster pace. It does not cost you any more money out of your pocket. An increase in the rate can chew up your equity at a faster pace, but if that is going to cause you more stress, then I would suggest that a reverse mortgage is not for you to begin with.
Remember, a reverse mortgage is meant to reduce financial stress, not create it.