When seniors decide to go with a reverse mortgage, the majority pick the credit-line option. There are several motives for this, but we’ll tackle that another time.
The reason for this article is to let you know about the margin increase taking place (within 7 days) in the reverse mortgage industry. This increase will be by at least .5%
Perhaps you aren’t clear on what a margin is? Well, allow me to inform. The banks and their investors charge a percentage inside the interest rate as their profit. This is margin.
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.
Last week the constant maturity treasury index was .40%. The margin banks were charging was 1.75%. This is the mortgage company profit. So, the actual interest rate was the margin plus the index totaling 2.15%.
We received word yesterday that Fannie Mae, the body securitizing these loans on the secondary market, has indicated this margin is going up a minimum of 1/2%.
This won’t necessarily hurt the borrowers profoundly. So far the rates have luckily been low enough to be under the Federal Housing Administration’s lowest rate, which is what decides the amount of money that can be loaned to a borrower.
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.
Fortunately, we are well below that rate, and for most borrowers the increase in margin won’t put them up above the floor. What that means is the borrowed amount they were quoted last week will still be good this week.
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.
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