What is the Interest Rate on a Reverse Mortgage Loan?

A reverse mortgage is a unique loan product that allows seniors aged 62 and older to access some of the equity in their home without having to make monthly mortgage payments. With a reverse mortgage, the lender pays the borrower either a lump sum, monthly payments, or a line of credit. The loan only comes due when the last borrower moves out, sells the home, or passes away.

One question that often comes up when considering a reverse mortgage is “what is the interest rate?” Since reverse mortgages work differently than traditional “forward” mortgages, the interest rate works a bit differently too. This article will explain everything you need to know about reverse mortgage interest rates.

How Reverse Mortgage Interest Rates Work

With a forward mortgage, the interest rate is set at the beginning and determines the size of the borrower’s monthly payments The rate stays the same over the full term of the loan

Reverse mortgages are different in two key ways

• The borrower does not make monthly payments
• The loan balance goes up over time rather than down

Since there are no monthly payments, the interest rate does not impact payment size. However, the rate does impact how quickly the loan balance grows.

Interest accrues on the reverse mortgage balance each month. As the borrower takes more funds out or as unpaid interest gets added to the balance the amount of interest owed also increases. Other costs like mortgage insurance also accrue over time.

The increasing loan balance does not need to be paid off until the home is sold or the borrower passes away. So even though interest is building up, the borrower is not responsible for paying it until the end of the loan.

Types of Reverse Mortgage Interest Rates

Reverse mortgages can have fixed or adjustable interest rates, just like forward mortgages. Here is an overview of how each works:

Fixed Rates

• The interest rate is set at closing and does not change for the life of the loan.

• Fixed rates are typically higher than adjustable rates.

• The borrower must take all funds as a lump sum at closing.

• Good option if the borrower plans to stay in the home only for a short time.

Adjustable Rates

• The interest rate changes annually based on an index.

• The initial rate is usually lower than fixed rates.

• Allows the borrower flexibility in how they take funds (lump sum, payments, line of credit).

• Interest only accrues on the funds withdrawn, not the full amount available.

• Most popular option due to payment flexibility.

How the Interest Rate Impacts Available Funds

The higher the interest rate, the less money the borrower will have access to. This is because reverse mortgages use something called the principal limit factor (PLF) to determine the amount available.

The PLF is a percentage applied to the home value or HECM lending limit ($1,149,825 in 2024). The PLF depends on the borrower’s age and the expected interest rate.

For example, a 75 year old with a 5% expected rate has a PLF of 52.7%. That means they can take 52.7% of their home value. With a higher 6% rate, the PLF drops to 50.5%, reducing available funds.

So when rates rise, the PLF and available funds decrease. That is why shopping for the lowest rate is very important. Even small differences in the rate can equate to thousands in savings.

Comparing Fixed and Adjustable Interest Rates

When evaluating reverse mortgage quotes, it is important to consider both the fixed and adjustable options. Here are some key points of comparison:

• Adjustable Rate – Lower initial interest rate and payment flexibility, but the rate can go up over time.

• Fixed Rate – Higher initial rate but it stays the same for the life of the loan. Must take all funds upfront.

• Change Over Time – Adjustable rate may start lower but eventually exceed fixed rate in the future.

• Available Funds – Adjustable allows larger lump sum due to higher PLF. Fixed limits funds to 60% in year 1.

• Certainty – Fixed provides certainty about the interest costs over time. Adjustable rate uncertainty increases over the loan term.

There is no definitively better option. The right interest rate type depends on the borrower’s goals, financial needs, and plans for the home.

For borrowers who want maximum funds and flexibility, adjustable rates often make sense. For those focused on predictability and short term access to equity, fixed rates may be preferable.

Keeping Track of Accrued Interest

Some borrowers worry that the interest costs on a reverse mortgage will accumulate out of control. However, there are protections in place to prevent this.

On adjustable rate HECM loans, the interest rate is capped at a maximum amount above the initial rate. This prevents unlimited interest growth.

The loan balance also cannot exceed the home value. If accrued interest and fees reach 98% of the home value, the loan is frozen so that the debt does not surpass what the home is worth.

Checking monthly statements can help borrowers track interest accruals and the overall loan balance. There is also peace of mind in knowing unused funds in a line of credit do not accrue interest.

How Much Are Current Reverse Mortgage Interest Rates?

Interest rates on reverse mortgages fluctuate just like other mortgage products. Here are the current rate ranges as of February 2024:

HECM Reverse Mortgage Rates

Rates for proprietary jumbo reverse mortgages are generally higher than HECM loans. Jumbo products also differ in that they do not require mortgage insurance.

To find the most current rates, it is best to get quotes from multiple lenders. Comparing quotes helps find both the lowest rate and overall costs.

Getting the Best Interest Rate on a Reverse Mortgage

Here are some tips for securing the lowest rate on a reverse mortgage:

• Check rates from at least 3 different lenders to compare offers. Rates can vary significantly from one company to another.

• Ask if the lender offers rate reductions for taking all funds upfront or having prior financial relationships. These reductions can be as much as 0.5%.

• Have an appraisal done so lenders know the exact home value. More certainty about home equity leads to better rate offers.

• Review credit reports and improve scores if possible. Higher scores qualify for lower rates.

• Avoid large purchases that increase debt prior to getting quotes. Added debt obligations increase rates.

• Consider adjustable rate options in addition to fixed rates. Adjustable rates are lower at the outset.

• Take quotes all within a short window of time, such as a week or two. Rates change frequently.

With an understanding of how reverse mortgage interest rates work and these rate shopping tips, borrowers can feel confident they are getting the best possible rate on their HECM loan. Reaching out to a knowledgeable loan officer makes the process seamless so borrowers can focus simply on accessing their available equity.