One of the main hurdles standing in the way of widespread acceptance of reverse mortgages is their sheer complexity. One good example is the reverse mortgage interest rate.
Most home owners, if asked the interest rate on their mortgage, could quickly and accurately answer – e.g. “We have a 30-year at 6.5%”. Even more complex adjustable rate mortgages are generally understood by most – “Ours is an adjustable that just went up to 5%”.
But when it comes to reverse mortgages, there is no simple answer to the interest rate question. This is because their are multiple interest rates involved in the reverse mortgage calculus. For example, with HUD’s Home Equity Conversion Mortgage (HECM), the most popular reverse mortgage type, there are at least 5 important interest rates the borrower needs to be aware of:
1. Expected Interest Rate – rate based on 10-year Treasury Note plus a margin. Used as one of the important factors (together with homeowners age and home value) in determining “how much” can be borrowed via a reverse mortgage.
2. Initial/Current Interest Rate – base interest rate charged on the outstanding loan balance. This rate is tied to the one-year Treasury rate and adjusts annually or monthly depending on the type of HECM loan.
3. Compounding Interest Rate – equal to the initial interest rate (above) + an additional 0.5% insurance premium charge. This is the rate that will actually determine the rate of loan balance growth.
4. Credit Line Growth Interest Rate – rate earned on the unused portion of a HECM credit line for borrowers who chose the credit line option (most do). For HECM’s, the credit line growth rate is equal to the compounding interest rate (above).
5. TALC (Total Annual Loan Cost) Rate – this rate is intended to give borrowers an “APR” like rate with which to comparison shop different reverse mortgage products and options. It is intended to be an all-inclusive rate incorporating fees and charges.
It’s very likely that many seniors have entered into reverse mortgages without fully grasping the important interest rate nuances involved. It’s even more likely that many seniors back away from reverse mortgages once they realize just how much more complex and different a reverse mortgage is.
For those willing to make the effort to learn and understand, a reverse mortgage can be a rewarding means to enhance the retirement years.