A Description of Reverse Mortgage Rate Options and Payment Plans

Once you decide you want to get a reverse mortgage, the next important decision is the rate option selection.  For people with large mortgages to pay off, it’s a fairly easy choice with the fixed rate lump sum option.  But if you need little cash initially and want to use the funds gradually over time, the line of credit or monthly payment option may be best and for this you must choose a variable rate option.  Then there’s the choice of standard or saver.  If you want the maximum dollar amount you must pay the full 2% MIP.  If you can get by with a lower amount of money, you can save quite a bit by opting for the saver option.  Remember, all of the closing costs are financed into the loan except the cost of the appraisal.

HECM Standard Fixed Rate This program has a fixed rate for the life of the loan.  Rate options begin in the mid-4% range.Lower rates tend to have higher origination fees although currently we offer zero origination fee on very low fixed rate options.  The only payment plan for the fixed rate program is a lump sum at closing.

HECM Standard Monthly Adjustable Rate The interest rate on this program can adjust every month with a lifetime rate cap of 10 points above the start rate. It is tied to the one month LIBOR index with margins ranging from 2.25% to3.0%. At this time, there is no monthly servicing fee charged.

Payment plan options include line of credit, monthly payments (term or tenure), lump sum of cash or a combination.  Interest accrues only on the amount taken out so the loan balance does not rise as rapidly as with a lump sum draw.  The available credit line has a growth rate equal to the interest and mip charged on the balance.

HECM Saver Program (Fixed or Adjustable Rate) This program became available Oct. 1, 2010.  It works like the above rate options, the difference is that the MIP is set at 1/10 of 1% of the home value or lending limit (.01%).  The money available is reduced from the ‘standard’ options.

Mortgage Insurance Premium MIP HUD/FHA charges 2% of the principal lending limit or appraised value (whichever is lower) for up front mortgage insurance on the standard option and .01% on the saver option.

The ongoing mortgage insurance is added to the unpaid principal balance at a rate of 1.25%.  This mortgage insurance goes to HUD/FHA and makes the HECM program possible as it removes the risk from the lender who can offer very competitive interest rates and provides safety for borrowers.

I often spend a lot of time talking with my clients about each option as every scenario is different and it is very important to explore these choices thoroughly.