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When a senior homeowner takes out a reverse mortgage, it may be the last mortgage they need. And, getting a great interest rate is important as the borrower may have this loan for several years. One of the unique features with a reverse mortgage is the borrower gets a better rate whether at application or right before closing. So, the senior is protected if the rate goes up, and they get the benefit of a lower rate if rates go down before closing.
Three Options for Rates
There are 3 options a senior can choose from when deciding if a reverse mortgage is right for them. Fixed rate, Adjustable Monthly and Adjustable Annual. If they choose Fixed, it’s a reduced lump sum amount they can access. If they choose one of the adjustable options, they can receive their equity 3 ways: lump sum, monthly installments or a line of credit that earns between 3-5% compound interest every year the loan is in place. Most homeowners are earning 0% on their home equity. And, when they access their equity, the proceeds are not taxed. See this video for further explanation.
Reverse Mortgage Interest Rates
How are interest rates calculated? We take the index plus a margin to get the interest rate. A borrower always earns .5% more on their equity than they pay in interest. Finally, how much equity can a senior homeowner borrow? This is a formula that is followed nationwide for FHA backed reverse mortgages. This amount is based on: the age of the youngest borrower, the value of the home (up to $765,600 in 2020) and the interest rate. For a 62 year old, they can access 40% of their equity. It’s best to take it as early as possible, to get the compound interest working in your favor.
For senior homeowners wanting to remain at home, maintain their independence, retain title as an owner and not have a mandatory monthly mortgage payment, a reverse mortgage may make sense.
