Borrowing from lenders through a reverse mortgage vehicle does accrue interest payments owed to the lender. Primarily, there are three types of reverse mortgages available to eligible homeowners, including proprietary reverse mortgages from private lenders, single-purpose reverse mortgages through state, local, and nonprofit organizations, and federally backed reverse mortgages, otherwise known as HECMs, or Home Equity Conversion Mortgages. The HECM reverse mortgage is backed by the US Department of Housing and Urban Development, and as industry statistics show, almost ninety percent of reverse mortgages are in the form of an HECM.
Interest Charged in Reverse Mortgage Lending
Once of the most notable features of the reverse mortgage includes the method by which interest is accrued and eventually repaid to the lender. During the months of the reverse mortgage, compound interest accrues on principal loan balances. This means that the longer a homeowner utilizes a reverse mortgage, the more the amount of interest owed will grow over time.
Homeowners have the option to borrow funds in different manners from their lender in a reverse mortgage, whether in a large lump sum, lines of credit, or on a scheduled monthly basis. The applicable interest rates for each of these options will vary, but ultimately, the amount interest owed on the principal balance of any reverse mortgage compounds on a monthly basis. It should be noted that interest charged is not tax deductible until the amount is actually paid to a lender.
At the end of the life of reverse mortgage loan, which occurs when the homeowner dies, sells a property, or no longer meet residency requirements, the unpaid principal balance owed and the interest amounts accrued are repaid to the lender through the sale of a home, or through refinancing made by a homeowner or their heirs. There are borrowing limits on the total percentage of equity a reverse mortgage holder is allowed to use, which is eighty percent, which assists lenders in recovering principal balance and interest accrued.
Setting Rates for Reverse Mortgages, Specifically HECMs
The scheduled for setting interest rates on single-purpose or proprietary reverse mortgages will vary based on the lender’s policies and practices providing these reverse mortgages. However, for HECM reverse mortgages backed the HUD, the following schedule:
- Reverse mortgages may contain either variable or fixed rates, while most contain variable rate agreements latched to some financial index, which will vary and change over time per market conditions
- Lenders must adhere to HUD rules when providing reverse mortgages, however, the interest rate a given lender will charge will vary by lender
- Reverse mortgages typically rely on an index base rate of the one-year treasury bill, and in addition, reverse mortgages are capped within certain interest rates and allotted adjustments
- Currently, the HECM reverse mortgage calculates interest rates using the index base rate of the one year treasury bill, plus an additional margin of 1.5% monthly adjustable rate or 3.1% annual adjustable rate, plus allotments for a maximum of 2% annual adjustable rate, with the overall interest rates being capped at the fully indexed rate plus 5% for annual adjustable rate loans or the fully indexed rate plus 10% for the monthly adjustable rate
Getting Legal Help
Having an attorney’s counsel and insight into how interest accrues in a given reverse mortgage is crucial for homeowners wanting to manage their existing assets. Reverse mortgages are complex lending vehicles, which require a keen understanding of financial terms and other attributes, which an attorney can decipher for homeowners.
