Taking out a reverse mortgage can be a convenient way to access the equity in your home. Unlike a home equity loan or home equity line of credit (HELOC), a reverse mortgage requires no payments as long as you use the home as your primary residence. However, interest and fees may accrue on the balance payable once you sell the home, move out, or pass away. There are also unscrupulous lenders who seek to take advantage of borrowers, so it is important to exercise caution.
Key points to remember
- A reverse mortgage offers homeowners a way to access the equity in their home and use it as a source of income without making payments to a lender.
- Federally backed reverse mortgages are called home equity conversion mortgages (HECM).
- Reverse mortgages can have higher interest rates than traditional mortgages or home equity loans.
- The rate you pay for a reverse mortgage can vary by lender, and you can choose a fixed or variable interest rate.
The reverse mortgage explained
Reverse mortgages offer homeowners a way to turn the equity in their home into an additional income stream. A reverse mortgage company pays out the equity to the homeowner, either in a lump sum or in installments. The owner does not repay the balance as long as he continues to use the house as his principal residence.
When the owner sells the property, moves out or dies, the reverse mortgage balance is payable in full. This includes the principal amount of borrowed equity as well as accrued interest and charges. A reverse mortgage is similar to a home equity loan or HELOC in that the homeowner taps into equity. What’s different is that they don’t make monthly payments to a lender.
Reverse mortgages may be offered by private lenders; federal, state, and local government programs; and non-profit organizations. A Home Equity Conversion Mortgage (HECM) is the only federally backed reverse mortgage. Specifically, HECMs are administered by the U.S. Department of Housing and Urban Development (HUD).
To get a Home Equity Conversion Mortgage (HECM), you must be 62 or older, own your home or have paid off most of the mortgage, have sufficient financial resources and not be in default. on a federal debt.
Reverse Mortgage Interest Rate
Interest on a reverse mortgage continually accrues, but payment of interest charges, fees and the principal balance is deferred until a later date, i.e. when the homeowner no longer lives in the home. In the case of married couples, a spouse listed as a co-borrower or an eligible non-borrower spouse has the right to stay in the home without paying anything for the reverse mortgage balance if their spouse moves out or dies.
Reverse mortgages can have fixed or variable interest rates. Fixed rates remain the same for the entire term that interest accrues. Variable rates have an underlying index and a margin rate. When changes occur in the benchmark rate, the variable rate on a reverse mortgage can follow suit. This means that the rate can go up or down in tandem with the reference rate.
Choosing a fixed rate for a HECM can provide some predictability in terms of estimating the amount of interest that will accrue on the balance, but there is a caveat: you are generally required to take the funds under form of lump sum. You can opt for installment payments with a variable rate HECM, but in this case it is more difficult to calculate how much interest will accrue.
|Home Equity Conversion Mortgage (HECM) Rates as of April 14, 2022|
|Fixed rate||Adjustable rate||loan limit|
The rates you pay for a HECM and the rates you pay for a reverse mortgage from a non-HECM lender can be very different. For this reason, it’s important to compare the best reverse mortgage companies online to see which offers the best rates and terms.
The amount you can borrow with a HECM will depend on current interest rates.
Other Reverse Mortgage Fees
Interest isn’t the only cost to consider when getting a reverse mortgage. There are other fees and charges that you may be responsible for.
With a HECM, for example, you also have to pay:
As a HECM is insured by the Federal Housing Administration (FHA), borrowers are subject to MIPs. This includes an initial MIP of 2% and an additional MIP of 0.5%, which applies for the duration of the loan.
HECM lenders may charge the greater of $2,500 or 2% of the first $200,000 of your home’s value, plus 1% of the amount over $200,000 for origination fees. HUD caps setup fees for HECMs at $6,000. This amount is deducted from the proceeds payable to you at closing.
Closing costs may include appraisal fees, title search fees, insurance, inspection fees and credit check fees. HUD does not specify an upper limit for these costs. Finally, your HECM lender may also charge a monthly service fee of up to $35.
The larger your HECM and the longer you hold the loan, the more these fees can add up, so it’s important to balance how much of your equity you want to access versus what the total fees may end up by being. If you need to move into a long-term care facility, for example, the full amount would be due if no eligible person lives in the home. You or your children will probably have to find the money to pay it off or sell the house to settle the balance.
Depending on the lender, you may be able to negotiate some closing costs to save money.
Are reverse mortgage interest rates higher?
Reverse mortgage rates are generally higher than interest rates for other types of mortgages, such as purchase loans or home equity loans. You should also factor in additional costs, including the initial 2% MIP, the ongoing 0.5% MIP, setup fees, and closing fees.
How do interest rates affect reverse mortgages?
Interest rates can affect how much of your home equity you can access through a HECM. Higher interest rates can reduce the amount of principal paid to you when you take out a reverse mortgage.
What is the average reverse mortgage rate?
Reverse mortgage rates are not static and the average rate can fluctuate over time. In April 2022, HECM rates ranged from 4.81% to 5.18%. For larger reverse mortgages, called “jumbo reverse mortgages,” they ranged from 5.49% to 6.50%. Non-HECM rates on so-called “proprietary reverse mortgages” could be higher, ranging from 4.90% to the high range of 6% in March 2022.
Reverse mortgages can be a useful addition to your retirement income strategy, but it’s important to understand that it’s not about free money. Interest will accrue, and the higher the rate, the more expensive a reverse mortgage will be in the long run. Considering the pros and cons of reverse mortgages, as well as other options such as home equity loans or HELOCs, can help you decide if this is the right choice for you.