Effective Oct. 31, the Federal Reserve Board will no longer publish interest rate swaps on its Selected Interest Rates (H.15). They are used to calculate what the expected interest rate on a reverse mortgage will be, according to Reverse Mortgage Daily. While the move is not expected to cause any major disruption, lenders are awaiting guidance from the U.S. Housing and Urban Development (HUD), which names H.15 as the primary source for calculating an expected reverse mortgage interest rate.
For now, let’s examine how interest rates on reverse mortgages work. If you are aged 62 and above, you may qualify for a reverse mortgage.
Reverse Mortgage Interest Rates
Home Equity Conversion Mortgages (HECMs) or reverse mortgages work differently than traditional forward mortgages. When you own a reverse mortgage, you will not make interest payments until your loan reaches maturity.
Maturity is triggered when your house is sold, you and your co-borrowers passed on or moved out of the house, or your loan defaulted because you failed to pay taxes and insurance. Until then, you are not required to make any payments every month, up front, or out of pocket.
Reverse Mortgage Interest Rate Types
Reverse mortgages come in two types of interest rates: fixed and floating/variable. Fixed rates are based on what the investors decide and what the HUD considers as the current lowest rate possible. Variable rates, on the other hand, are based on an index rate plus margin.
The more important question is, which of these two types is better for reverse mortgage owners? Let’s weigh their upsides and downsides.
1. Fixed-Rate Reverse Mortgages. If you (i) want stability and assurance that the rate will remain the same throughout the life of the loan and (ii) plan to use your loan proceeds at once, the fixed-rate reverse mortgage might be for you.
The fixed-rate mortgage requires that you take out your funds in a lump sum. If you don’t use it for mandatory obligations like home repairs, paying off your old mortgage, and property tax and homeowners’ insurance payments, you can access only 60% of the principal limit of the loan. If you use it for mandatory obligations and they exceed the 60% threshold, you may access another 10% but subject to an increase in the upfront mortgage insurance premium (MIP).
2. Adjustable-Rate Reverse Mortgages. If you want flexibility in withdrawing your reverse mortgage funds, the variable-rate mortgage offers various disbursement options.
With ARMs, you can receive your funds in equal monthly payments, unscheduled payments whenever you need it (line of credit), or a combination of a line of credit and monthly payments. You are only being charged of what you have withdrawn. And if you have unused funds in your line of credit, they can grow at a compounded rate.
Reverse Mortgage Expected Rates
Reverse mortgages usually have an expected rate which is calculated at origination by the lender. This expected rate is then used to determine the reverse mortgage’s principal limit as well as servicing set aside.
The HECM Protocol set these formulae for calculating the expected interest rate (EIR) on fixed-rate and adjustable-rate mortgages:
No definite timetable has been announced on the release of the HUD’s guidance regarding the interest swaps. The agency and the Federal Reserve are currently discussing the next steps, a HUD spokesperson told Reverse Mortgage Daily.