Three Different Interest Rates Come With A Reverse Mortgage – Initial Rate / Expected Rate / TALC Rate
As with all types of loans and mortgages, interest rates are a very important part of the equation. People often get hung up on rates by trying to compare interest rates on a reverse mortgage to a traditional 30-year fixed mortgage.
It is more than likely that the interest rate for a reverse mortgage is going to be higher than any
traditional forward mortgage. You can’t compare reverse mortgage rates to current 30-year fixed rates, just like you can’t compare rates between a 30-year fixed rate loan and a 15-year fixed rate loan. The reason you can’t compare them is because they are all very different loan products with significantly different outcomes and risk.
There are several loan options with different interest rates for you to consider.
Fixed Rate Reverse Mortgage Option
The fixed interest rate is fixed for the entire life of the reverse mortgage. However, as you learned here, you are limited on the amount of cash you could potentially receive and you do not get access to future payments or lines of credit.
Adjustable Rate Reverse Mortgage Options
There may be several options to choose from with the adjustable rate mortgage depending on the lender you are working with. However, the most common options you will be considering are the annual adjustable rate and the monthly adjustable rate.
The annual adjustable rate mortgage comes with an interest rate that can adjust one time per year, up or
The monthly adjustable rate mortgage comes with an interest rate that can adjust up or down monthly.
The start rate, or initial interest rate, is typically lower with the monthly adjustable rate.
Reverse Mortgage Interest Rate Caps
There are caps on how much the rates can move up or down per adjustment. There are also lifetime caps on the adjustments. The most the interest can adjust per adjustment period is 2%. The lifetime cap on the annual adjustable is 5% above the initial interest rate. The lifetime cap on the monthly adjustable
rate is either 5% or 10% above the initial interest rate depending on the loan option you choose.
If the initial start rate with an annual adjustable rate mortgage was 4.75%, the maximum it could increase, or its lifetime cap rate, would be 9.75%.
If the initial start rate with a monthly adjustable rate mortgage was 4.75%, the maximum it could increase, or its lifetime cap rate, would be 9.75% or 14.75% depending on the loan option.
Interest Rate Calculations
There are two components of the interest rate. They are the margin and the index. The margin is the fixed portion of the interest rate. The index is the adjustable portion of the interest rate. The index is either the 1-year LIBOR or the 1-month LIBOR, depending on which option you choose. Adding the margin plus the index gives you the interest rate.
Annual adjustable rate:
Margin + 1-year LIBOR Index = Interest Rate
Monthly adjustable rate:
Margin + 1-month LIBOR Index = Interest Rate
The margin is the rate of return that the lender wants to receive above the index. Should the index ever
go to zero, interest would be accruing at the margin.
The other interest rate you will see is the expected rate. This will be covered a little bit more in depth
on its affect to you as a borrower in the next chapter. The purpose of the expected rate is to forecast future rates as well as determine how much you can borrow. With a fixed rate mortgage, the expected rate is the same as the initial rate.
Expected rates are calculated by adding the 10-year SWAP rate and the margin.
Margin + 10-year SWAP rate = Expected Rate
Total Annual Loan Cost (TALC) Rate
The purpose of the TALC rate is to show you the cost of the loan in the form of an annual interest rate over the life of the loan.
What you will find is that the TALC rate is higher in the beginning of the loan and decreases over time. This is to point out that you are spreading out the costs over time, and the longer you have the loan, the less expensive it becomes. In other words, you need to understand that the reverse mortgage is not a short-term solution.