Reverse Mortgage Margins on LOC Going Up This Week
When going forward with a reverse mortgage the borrower has multiple options. The line of credit is, by far, the number one option and for good reason.
What I’m referring to here is the fact that this week, the margins charged by reverse mortgage lenders nationwide will increase a half percent or more.
You may be asking what is the margin? Glad you asked. The margin is the profit the bank or more particularly the banks investors charges on the loan.
For instance, where reverse mortgages are concerned the majority of seniors were going along with the credit line based on the constant maturity treasury. This index is the basis for the loan.
A couple of days ago the lender’s marginal charge (banks profit) was 1.75%. The constant maturity treasury index rested at a .40%, the total of these is 2.15%. This would be the real rate of interest on the loan.
Lenders were sent notice just yesterday that Fannie Mae (a group that backs loans on the secondary market) has bumped up the margin .5 percent at the least.
The effects on borrowers will be fairly limited. We’ve had the good fortune of rates being so low they are below the FHA floor rate which determines how much money a borrower may cash out.
Rates are tied to how much a borrower can borrow. When rates are higher they get less. And vice versa. Well, when they hit a certain low rate (FHA floor), any rate below that will not get the borrower more money.
We are luckily a good bit under the floor FHA rate, and the margin going up will not throw seniors above it. So if you were given a loan quote last week, it is still okay to go by that.
The higher marginal charge will deduct from the equity in the home more quickly. Yes, I just mentioned a negative of the reverse mortgage. But remember the senior won’t be paying anyone, which is a huge plus.
Interest is eating away equity, and that is the negative aspect. Due to the marginal increase, it will deduct from it a little more rapidly than before.