Understanding Reverse Mortgage Interest Rates
Reverse mortgage interest rates are a key factor in determining how much money a borrower may qualify for. While rates can be complicated, it is important to understand how they affect your loan. Therefore, if you are considering a reverse mortgage, you likely have questions about reverse mortgage interest rates.
To learn more about reverse mortgage requirements and reverse mortgage interest rates, please call one of our experts at Citizens Lending Group at (800) 480-6828 or use our convenient online contact form to submit your questions.
How Do Reverse Mortgage Interest Rates Work?
Interest is essentially the fee charged on the funds received from any loan. These charges are calculated daily based on the interest rate applicable at the time, added to the loan balance monthly, and are reflected on the monthly loan statement.
Reverse mortgages differ from other traditional loans and lines of credit because the interest payments on the loan are not paid monthly, but rather are deferred to the end of the life of the loan. While most loan interest must be paid monthly, reverse mortgage interest rate payments are compounded into the loan and are due at maturity.
Types of Reverse Mortgage Interest Rates
As with other mortgages and loans, reverse mortgage interest rates are either "Fixed" or "Variable" (also known as "floating"). Fixed rates are set at the closing of the loan, and stay the same throughout the life of the loan. Variable rates change over the life of the loan, and are based on a published index rate (such as LIBOR) plus a margin, or interest percentage that is added to the index rate. While the index may change, the margin stays the same throughout the life of the loan.
Whether a fixed or variable rate mortgage is best for you depends on both the state of the housing and interest rate markets and your personal finances.
Fixed Reverse Mortgage Interest Rates
Fixed rate reverse mortgages are generally preferred by potential borrowers. Approximately 67% of reverse mortgage loans originated since 2009 were fixed rate loans. These loans are popular with borrowers because they eliminate the risk that interest rates will increase during the life of the loan.
There are pros and cons to fixed rate reverse mortgages. Fixed rates remain constant during the life of the loan so borrowers are protected if interest rates rise in the market. The downside to fixed rate reverse mortgages is that borrowers are limited in their disbursement options - they must take the loan funds as a lump sum, which is limited to 60% of the principal limit of the loan.
All in all, fixed rate reverse mortgages are often best for borrowers who plan to use the funds from their loan all at once, such as to pay off existing debt, make a major purchase, or renovate or repair the home.
Variable Reverse Mortgage Interest Rates
Variable rate reverse mortgages tend to be less popular than fixed rate reverse mortgages, but they are more flexible. The interest rate is not locked in over the life of the loan, but rather varies along with published reference rates such as LIBOR. Thus, borrowers may benefit if interest rates decline over the life of the loan.
There are other benefits to variable rate mortgages as well. For example, borrowers have more disbursement options with variable rate reverse mortgages. Borrowers may choose among monthly payments, a line of credit, a lump sum, or a combination of these options. Interest is only charged on funds that are actually withdrawn, so if a borrower opts for a line of credit but only withdraws a small amount, he is only charged interest on the portion actually withdrawn. The downside to a variable rate reverse mortgage is uncertainty - there is a risk that interest rates may increase and the borrower ends up paying more in interest than he would have with a fixed rate loan.
Learn More About Reverse Mortgage Interest Rates
Ultimately, reverse mortgage interest rates are complicated, and borrowers are advised to discuss all options with a financial professional before deciding what works best for them.
If you need help understanding reverse mortgage interest rates, Citizens Lending Group is here to provide you with more information. Call us at (800) 480-6828 to learn more about reverse mortgage interest rates, or use our convenient online contact form.