Interest Rates Take Big Jump this Week for Reverse Mortgage
When seniors decide to go with a reverse mortgage, the majority pick the credit-line option. There are several motives for this, but we’ll tackle that another time.
The point here is to inform you that, industry wide, the margins reverse mortgage companies charge will go up this week by, at the very minimum, 1/2 percent.
You may be asking what is the margin? Glad you asked. The margin is the profit the bank or more particularly the banks investors charges on the loan.
The line of credit based on the constant maturity treasury index is what almost all borrowers of a reverse mortgages were using if the went forward with a reverse mortgage with a line of credit.
A couple of days ago the lender’s marginal charge (banks profit) was 1.75%. The constant maturity treasury index rested at a .40%, the total of these is 2.15%. This would be the real rate of interest on the loan.
Fannie Mae (the organization who secures secondary loans) has now forewarned that the bank’s margin will increase at least a half percent.
The borrower won’t really see any huge negatives from this. Up to this point we’ve been blessed by interest rates being below FHA’s ground rate. This rate is what is used to figure the most money a lender can allocate to the borrower.
The loan amount a borrower is eligible to receive and interest rate have an inverse relationship. The reverse mortgage will be greater if the rate is low, but if the rate is so low it meets or is below the FHA floor, the senior’s loan won’t be increased to match it.
We are luckily a good bit under the floor FHA rate, and the margin going up will not throw seniors above it. So if you were given a loan quote last week, it is still okay to go by that.
What will happen is the equity will evaporate slightly more rapidly due to the margin being raised. This isn’t the best thing about a reverse loan, but not having to pay the mortgage company every month helps.
The downside is interest is accruing against the equity of the home. The higher margins will simply make that interest accrue a little quicker.
