Understanding Reverse Mortgage Rates

While most consumers understand how interest rates impact traditional mortgage loans, many fail to understand the importance of reverse mortgage rates. As with other mortgage loans, reverse mortgages are given either fixed or variable interest rates. These rates are important for several different reasons. Most importantly, a borrower’s interest rate will determine how much he or she will be eligible to receive through a reverse mortgage. The lower one’s interest rate, the higher the payout. Reverse mortgage rates also determine the amount of money borrowers will owe to their lender in the future. While this may not be an immediate concern, a borrower’s rate might impact the inheritance of his or her heirs. For these reasons, interested consumers should take the time to understand reverse mortgage rates before further pursuing a loan. rnHow Reverse Mortgage Rates Are Determined There are many different factors that affect reverse mortgage rates. The first is the payment plan a borrower chooses. Fixed interest rates are only available to borrowers who want to receive their payment in one lump sum. The benefit of choosing a fixed interest rate is that the rate will never increase over time. However, since this limits one’s payout options, a reverse mortgage with a fixed rate may not always be the best choice. Reverse mortgages can also be given variable interest rates. These rates are currently based on the LIBOR, or the “London Inter-Bank Offered Rate” index. Adjustable interest rates may adjust annually, semi-annually, or monthly. Fortunately, reverse mortgage rates are capped so that the interest rate may never exceed a certain amount. It is also important to understand that lenders add a margin onto the rate set by the LIBOR index. Therefore, adjustable rates will vary slightly by lender. At this time, interest rates do not vary according to a borrower’s credit worthiness. Borrowers with good credit are not given lower interest rates than those with less positive credit histories. While this may not be welcome news to every borrower, these regulations were enacted to help all cash-poor but equity-rich seniors qualify for a reverse mortgage. rnFixed Versus Variable Reverse Mortgage Rates: Which Benefits Borrowers? There are many things to consider when choosing a reverse mortgage loan. Fixed-rate reverse mortgage loans are beneficial for borrowers who need a large amount of money upfront. For instance, a person who needs a reverse mortgage to repay their original mortgage loan might choose to receive a lump sum at a fixed interest rate. However, because interest begins accruing as soon as the borrower receives their payment, this option is usually not a good choice for borrowers who do not need the money for a specific purpose. Borrowers who choose to receive monthly payments or open a line of credit, instead of taking a lump sum, will only be charged interest on the amount they have received. In some cases, this decreases the amount of interest a person will pay over the life of the loan. To determine the most beneficial interest rate and payment option, borrowers will need to carefully consider their options and discuss the benefits of each with their lender.