Until April, 2013 borrowers could choose either a fixed or an adjustable rate reverse mortgage. However, HUD and FHA suspended all fixed rate loan options indefinitely. The reason given, is due to the high level of defaults by past borrowers that did not stay current on the payment of their property taxes and homeowner insurance premiums.
Consequently, the FHA Mortgage Insurance Fund had to make the delinquent payments on behalf of those borrowers, causing the fund to become insolvent to the tune of almost 3 Billion dollars. FHA is at risk of having to request a bail out from Congress to make the insurance fund solvent again. To that end, FHA identified the HECM fixed option as having had the most negative impact on the insurance fund and committed to Congressional leaders that they would do their part in remedying the situation by way of eliminating all fixed rate HECM’s.
Today HECM (Home Equity Conversion Mortgage) interest is adjustable and tied to an index such as Libor. LIBOR stands for “London Inter-Bank Offered Rate.” It is based on rates that contributor banks in London offer each other for inter-bank deposits. The chart below, published by Money Cafe, illustrates the Libor rates from 2003 to 2013.
Interest rates will vary depending on market conditions and the type of reverse mortgage you select.
FHA Insured HECM
- For the most popular Senior reverse mortgage, the FHA insured HECM (Home Equity Conversion Mortgage) loan, the interest rate is adjusted either monthly or annually.
- For HECM loans that adjust monthly, the interest rate charged on the loan for the next month is equal to the current one-month Libor rate plus a margin.
- For HECM loans that adjust annually, the interest rate charged on the loan for the next year is equal to the current one-year Libor rate plus a margin.
Adjustable rate loans are very flexible with regard to how you can receive your money, and interest is charged ONLY on the amount of money you actually use or withdraw.
Current interest rates for the indexes mentioned above are published daily online and in the financial or business sections of all major newspapers. Interest charged on HECM loans is “accrued”, which means there is no payment of interest until the loan is paid off, either at time of death or when the home is sold.