April 2008
Types of reverse mortgages
The most prevalent reverse mortgage is HUD's Home Equity Conversion Mortgage. Under the HECM program, the size of the loan
is determined by the homeowner's age, the current interest rate, other loan fees, and the appraised value of the property
up to the Federal Housing Administration's mortgage limits for the area where the home is situated. FHA limits on single-family
homes range from $200,160 in small metropolitan areas like Baton Rouge, La., and Rapid City, S.D., to $362,790 in San Francisco
and New York City, among other high-priced locations.
The lending formula is drawn from actuarial and compound-interest tables, among other factors. HUD estimates that on a loan with a 9 percent interest rate, a 65-year-old could borrow about 22 percent of the home's value, a 75-year-old up to 41 percent, and an 85-year-old about 58 percent. (The National Reverse Mortgage Lenders Association's reverse-mortgage calculator can help you to figure out about how much you might might be eligible to borrow.)
Interest rates on HECMs have traditionally been linked to the 1-year Constant Maturity Treasury rate, which was 3.26 percent in December 2007. For monthly adjustable-rate loans, HUD lenders generally tack about 1 to 1.5 percent onto that rate, a surcharge called a margin. Over the life of the loan, interest-rate resets are capped at 10 points. Annual adjustable reverse mortgages are also available. Slightly more expensive, they have a margin of about 3 percent over the CMT and can be raised or lowered by 2 percent each year, with a lifetime cap of 5 percent.
Recently some HUD lenders have introduced new versions of the loan that are tied to the London Interbank Offered Rate, a common adjustable-mortgage benchmark that tends to have fewer wide swings than the CMT. But the LIBOR was at 4.41 percent in early January, and lenders usually add a margin of 0.65 to 1 percent. Interest rates on CMT-based loans now have lower initial rates than LIBOR-based loans.
Fixed-rate reverse mortgages are currently available with reasonably low rates of about 6 percent. But there's a catch: You must take your money as one up-front payment. So unless you need the full loan amount immediately, these mortgages might not be the best option.
One nice feature of HECM loans is that the unused available balance will increase in value by the loan's interest rate. This is an advantage to borrowers who take their equity out over a long period of time.
The lending formula is drawn from actuarial and compound-interest tables, among other factors. HUD estimates that on a loan with a 9 percent interest rate, a 65-year-old could borrow about 22 percent of the home's value, a 75-year-old up to 41 percent, and an 85-year-old about 58 percent. (The National Reverse Mortgage Lenders Association's reverse-mortgage calculator can help you to figure out about how much you might might be eligible to borrow.)
Interest rates on HECMs have traditionally been linked to the 1-year Constant Maturity Treasury rate, which was 3.26 percent in December 2007. For monthly adjustable-rate loans, HUD lenders generally tack about 1 to 1.5 percent onto that rate, a surcharge called a margin. Over the life of the loan, interest-rate resets are capped at 10 points. Annual adjustable reverse mortgages are also available. Slightly more expensive, they have a margin of about 3 percent over the CMT and can be raised or lowered by 2 percent each year, with a lifetime cap of 5 percent.
Recently some HUD lenders have introduced new versions of the loan that are tied to the London Interbank Offered Rate, a common adjustable-mortgage benchmark that tends to have fewer wide swings than the CMT. But the LIBOR was at 4.41 percent in early January, and lenders usually add a margin of 0.65 to 1 percent. Interest rates on CMT-based loans now have lower initial rates than LIBOR-based loans.
Fixed-rate reverse mortgages are currently available with reasonably low rates of about 6 percent. But there's a catch: You must take your money as one up-front payment. So unless you need the full loan amount immediately, these mortgages might not be the best option.
One nice feature of HECM loans is that the unused available balance will increase in value by the loan's interest rate. This is an advantage to borrowers who take their equity out over a long period of time.
