Fixed Rate Starting to Look Better for Reverse Mortgage
If you were to ask me one year ago which choice for senior borrowers was the better one, between the fixed rate and the adjustable, I would have told you the adjustable with few exceptions.
But since lenders in reverse mortgage backed securities are wanting more payoff than ever, people in the mortgage industry are beginning to think twice about this.
The margin that banks and their investors needed was at approximately 1% at this time last year. Go ahead and liken the "margin" to "profit margin". It is the profit in the loan.
So, if the borrower went with the LIBOR index which may be 1%, and the former margin was 1%, the interest rate would equal the index plus the margin (1% + 1% = 2%).
Well, margins are on the rise since this time last year. By March they went to one point five percent and by October one point seven-five percent.
Guess what, word around the campfire is the margins, industry wide, will raise next week. Fannie Mae is set to raise the margin at least 1/2 point.
There are many reasons why the ARM is such an attractive reverse mortgage option. In fact I wrote an article dedicated to it, but these changes are cutting into the weight of my arguments.
For example, when a senior borrower closes on the reverse mortgage, he has the option of taking as much or little of his allotment as he chooses. What if he takes a lot?
What if the borrower had the choice of taking a large lump sum like $150,000. The lender gives the choice of taking any denomination. What if the borrower takes it all. In this case the fixed may be better because it's about the same as the average on the adjustable with the new higher margins.
Although the adjustable is still extremely low right now one can expect it to go up in the coming years. We can't expect these low rates to continue.
Another thing is the amount of money a reverse mortgage lender would lend to a borrower using an adjustable rather than a fixed was more pronounced than it is today.
The ARM used to be a no brainer in terms of how much money it gave a borrower rather than the fixed. It's far closer now and one never knows. Perhaps after the change the fixed will give more.
We don't know quite yet, but the fixed rate is gaining on the ARM.
But since lenders in reverse mortgage backed securities are wanting more payoff than ever, people in the mortgage industry are beginning to think twice about this.
The margin that banks and their investors needed was at approximately 1% at this time last year. Go ahead and liken the "margin" to "profit margin". It is the profit in the loan.
So, if the borrower went with the LIBOR index which may be 1%, and the former margin was 1%, the interest rate would equal the index plus the margin (1% + 1% = 2%).
Well, margins are on the rise since this time last year. By March they went to one point five percent and by October one point seven-five percent.
Guess what, word around the campfire is the margins, industry wide, will raise next week. Fannie Mae is set to raise the margin at least 1/2 point.
There are many reasons why the ARM is such an attractive reverse mortgage option. In fact I wrote an article dedicated to it, but these changes are cutting into the weight of my arguments.
For example, when a senior borrower closes on the reverse mortgage, he has the option of taking as much or little of his allotment as he chooses. What if he takes a lot?
What if the borrower had the choice of taking a large lump sum like $150,000. The lender gives the choice of taking any denomination. What if the borrower takes it all. In this case the fixed may be better because it's about the same as the average on the adjustable with the new higher margins.
Although the adjustable is still extremely low right now one can expect it to go up in the coming years. We can't expect these low rates to continue.
Another thing is the amount of money a reverse mortgage lender would lend to a borrower using an adjustable rather than a fixed was more pronounced than it is today.
The ARM used to be a no brainer in terms of how much money it gave a borrower rather than the fixed. It's far closer now and one never knows. Perhaps after the change the fixed will give more.
We don't know quite yet, but the fixed rate is gaining on the ARM.
posted by Debt Consolidation Loan at
7:17 PM
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