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The ongoing costs of a reverse mortgage include interest on loan balances and management fees.Retired researcher

The recurring costs of a reverse mortgage relate to the interest accrued on any outstanding loan balance, as well as the management fees. The service fee can go up to $ 35 per month, although they are usually integrated at a higher margin rate rather than billed directly to the borrower. The interest on the loan balance increases at the effective rate:

Effective rate = one-month LIBOR rate + lender margin + annual mortgage loan insurance premium (0.5%)

As of October 2017, the one-month LIBOR rate was about 1.25% and the ten-year LIBOR rate swap rate was about 2.25%. If we assume a lender spread of 2.75%, this gives an expected rate of 5% and an effective rate of 4.5%:

Expected rate = 2.25% + 2.75% = 5% (for initial initial limit)

Effective rate: = 1.25% + 2.75% + 0.5% = 4.5% (for growth at the capital limit)

Once determined by the capital limit factor, the initial line of credit automatically increases at a variable rate equal to the lender's margin, a mortgage loan insurance premium, and subsequent LIBOR or one-month cash values. or a year. rates. These short-term rates are the only variable part of future growth, since the lender's margin and the PMP are set at the beginning. Although the floating rate may be a LIBOR or a one-month or one-year Treasury rate, I will refer to LIBOR at a later date. The effective rate is adjusted monthly.

For more information, download our Reverse Mortgage 101 Cheatsheet.

Exhibit 1.1 summarizes how planned rates and effective rates are calculated and when they are applied.

Table 1.1: Reverse Mortgage Interest Rates

Type components Apply to:
Expected rate LIBOR swap rate 10 years + margin of the lender Initial capital limit factor
Reserved contracts for service fees in old mortgages
Effective rate One-Month LIBOR Rate + Lender's Margin + Mortgage Loan Insurance Premium (0.5%) Main limit growth rate in progress
Credit balance growth rate
Growth rate of the line of credit
Markets after 2014 for people in financial difficulty

The lender's margin rate and the outstanding mortgage insurance premium are set contractually at the beginning of the loan and can not be changed. The margin rate applied to the loan balance is the primary means available to the lender – or any buyer in the secondary market – to generate income, particularly for lenders who have waived origination and management fees. Reasonable margin rate estimates are generally between 1.75% and 4.5%, with higher values ​​generally associated with lower start-up and / or service costs.

At the same time, the outstanding mortgage insurance premium allows the government to meet its obligations under the guarantees it has underwritten under the HECM program for lenders and borrowers. I noted that the government guaranteed two things: that the borrower could access the fully paid line of credit, regardless of the financial difficulties of the lender, and that the insurance fund would reimburse the lender in full at the end of the payment and the balance of the loan exceeds 95% of the estimated value of the house. The government fund also assumes the risk with the payment options of the length of service and the duration, since distributions are assured to continue when the borrower stays at home, even if the capital limit has been fully exploited.

Insurance premiums prevent homeowners from having to repay more than the value of the home when the loan balance exceeds that value. The lender is also protected because the FHA pays the difference in such cases. While this may potentially leave taxpayers on the hook if mortgage insurance premiums are not enough to cover these cases, the government is trying to stay abreast of this case. Mortgage insurance premiums and capital limit factors have been adjusted over time to help maintain the balance of the system.

Previously, I felt that if the option to open a line of credit and leave it unused for many years became more and more popular, further changes may be needed to make the mortgage insurance fund remains viable. Among other things, the new rules of October 2017 aimed to achieve this goal by reducing the likelihood that the main limit would be greater than the value of the house.

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The recurring costs of a reverse mortgage include interest on the loan balance and service fees. Retired researcher

The recurring costs of a reverse mortgage relate to the interest accrued on any outstanding loan balance, as well as the management fees. The service fee can go up to $ 35 per month, although they are usually integrated at a higher margin rate rather than billed directly to the borrower. The interest on the loan balance increases at the effective rate:

Effective rate = one-month LIBOR rate + lender margin + annual mortgage loan insurance premium (0.5%)

As of October 2017, the one-month LIBOR rate was about 1.25% and the ten-year LIBOR rate swap rate was about 2.25%. If we assume a lender spread of 2.75%, this gives an expected rate of 5% and an effective rate of 4.5%:

Expected rate = 2.25% + 2.75% = 5% (for initial initial limit)

Effective rate: = 1.25% + 2.75% + 0.5% = 4.5% (for growth at the capital limit)

Once determined by the capital limit factor, the initial line of credit automatically increases at a variable rate equal to the lender's margin, a mortgage loan insurance premium, and subsequent LIBOR or one-month cash values. or a year. rates. These short-term rates are the only variable part of future growth, since the lender's margin and the PMP are set at the beginning. Although the floating rate may be a LIBOR or a one-month or one-year Treasury rate, I will refer to LIBOR at a later date. The effective rate is adjusted monthly.

For more information, download our Reverse Mortgage 101 Cheatsheet.

Exhibit 1.1 summarizes how planned rates and effective rates are calculated and when they are applied.

Table 1.1: Reverse Mortgage Interest Rates

Type
components
Apply to:
Expected rate
LIBOR swap rate 10 years + margin of the lender
Initial capital limit factor
Reserved contracts for service fees in old mortgages
Effective rate
One-Month LIBOR Rate + Lender's Margin + Mortgage Loan Insurance Premium (0.5%)
Main limit growth rate in progress
Credit balance growth rate
Growth rate of the line of credit
Markets after 2014 for people in financial difficulty

The lender's margin rate and the outstanding mortgage insurance premium are set contractually at the beginning of the loan and can not be changed. The margin rate applied to the loan balance is the primary means available to the lender – or any buyer in the secondary market – to generate income, particularly for lenders who have waived origination and management fees. Reasonable margin rate estimates are generally between 1.75% and 4.5%, with higher values ​​generally associated with lower start-up and / or service costs.

At the same time, the outstanding mortgage insurance premium allows the government to meet its obligations under the HECM guarantees to lenders and borrowers. I noted that the government guaranteed two things: that the borrower could access the fully paid line of credit, regardless of the financial difficulties of the lender, and that the insurance fund would reimburse the lender in full at the end of the payment and the balance of the loan exceeds 95% of the estimated value of the house. The government fund also assumes the risk with the payment options of the length of service and the duration, since distributions are assured to continue when the borrower stays at home, even if the principal limit has been fully exploited.

Insurance premiums prevent homeowners from having to repay more than the value of the home when the loan balance exceeds that value. The lender is also protected because the FHA pays the difference in such cases. While this may potentially leave taxpayers on the hook if mortgage insurance premiums are not enough to cover these cases, the government is trying to stay abreast of this case. Mortgage insurance premiums and capital limit factors have been adjusted over time to help maintain the balance of the system.

Previously, I felt that if the option to open a line of credit and leave it unused for many years became more and more popular, further changes may be needed to make the mortgage insurance fund remains viable. Among other things, the new rules of October 2017 aimed to achieve this goal by reducing the likelihood that the main limit would be greater than the value of the house.