Rates are extremely low right now, and I’m not just talking about traditional fixed rate mortgages. When reverse mortgage rates drop, it’s highly beneficial to new reverse mortgage prospects as well as for existing borrowers with federally insured reverse mortgages called a Home Equity Conversion Mortgages (HECMs). As a result, I’ve been asked by many loan originators and consumers to explain how and when their variable rate HECM loans will adjust.
WHEN DO RATES CHANGE?
Monthly adjustable HECMs, as the name implies, adjust each month. The more popular annually adjustable HECM adjusts once every year. At closing, the lender will choose a specific annual adjustment day within HUD parameters. By convention, annual HECMs generally adjust on the 1st day of the month following the anniversary of the closing date.
For example, if you closed on July 15, 2019, your rate change would be scheduled 12.5 months later – August 1, 2020. In this example, the first of August would be your designated rate change date every year.
AM I NOTIFIED OF THE CHANGE?
Yes. HUD requires the borrower to be notified of the specific rate and publication date 25 days before any rate change. Using the example above, the notification would be postmarked on, or before, July 7, 2020.
WHAT RATE IS USED?
For the annually adjusted HECM, that is generally the 1-year LIBOR index published in the Monday Wall Street Journal. When the LIBOR index is phased out at the end of 2021, a comparable index will be approved by HUD and used for future rate changes.
Contrary to popular opinion, we are NOT using the rate that is “PUBLISHED” 30 days prior (or 1 month prior) to the rate change date. Rather, we are using the rate that is “IN EFFECT” 30 days prior the rate change date.
Once again, using our example above, the servicer would use the rate in effect on July 2, 2020 for the August 1, 2020 rate change.
REAL WORLD EXAMPLE
Let’s look at published 1-year LIBOR rates at the end of June and beginning of July 2020:
- Friday 6/26/20 0.566% *
- Wednesday 7/1/20 0.533% (1 month prior to 8/1 rate change)
- Thursday 7/2/20 0.539% (30 days prior to 8/1 rate change)
*Note: This rate is published on Monday 6/29 and is in effect Tuesday 6/30 through Monday 7/6
In this case, the rate that was in effect 30 days prior to August 1st was the Friday June 26th rate published on Monday June 29th, even though that is more than 1 month before the rate change.
If this existing HECM loan has a 2% lender margin, the borrower’s interest rate will adjust to 2.566% on August 1st and remain at that rate for 12 months.
I hope this clarifies a rather confusing reverse mortgage concept. For more information on how reverse mortgages function, please subscribe to this blog and consider purchasing a copy of Understanding Reverse.