Sunday, February 22, 2009

The Truth About Reverse Mortgage Rates

Millions of Americans refinance their home every year. When researching for a home loan most are only concerned with the interest rate on the loan. This is fine for traditional loans but with a reverse mortgage there are two interest rates that you need to be aware of. If you are looking to refinance your home into a reverse loan and are not familiar with the two different reverse mortgage rates, then you will want to read this.

A HECM or Home Equity Conversion Mortgage is currently the only reverse mortgage available. The good news is this loan is provided through the Federal Housing Administration or FHA. Thus, it is a very secure loan that has many protections set up for its borrowers. Most don't realize that there are two reverse mortgage rates that a potential borrower should understand.

The first is the Initial Rate, also called the current rate. This is the interest that is charged on your HECM loan balance. Keep in mind that since the loan required FHA mortgage insurance, an additional .5% is charged to the Initial Rate.

As the borrower you will choose whether you want a yearly or monthly interest rate adjustment period. It's important to note that once this is chosen it cannot be changed. Both adjustment periods for the Initial Rate are tied to the one-year US Treasury Security Rate.

The second reverse mortgage rate that you need to be aware of is the Expected Rate. This rate is used to calculate the size of the reverse mortgage loan or the highest amount of money you can borrow against the home. Since this rate is used to determine what a borrower qualifies for, the lower the rate the greater loan amount a borrower can get.

The Expected Rate equals the current US Treasury Securities rate adjusted to a constant maturity of 10 years, also known as the 10 Year Treasury Rate, plus the lenders margin. Once this rate is set it is never charged on the loan. It is only used to determine the loan payments to the borrower.

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