An adjustable-rate loan’s initial interest rate relies on the index and margin. When you sign the loan, these numbers are added to calculate your interest rate. The initial interest rate of your reverse mortgage is what you’ll be charged during the first index rate period. This could be a month or a year. If you have a fixed-rate reverse mortgage, the initial interest stays the same throughout the loan’s lifetime. The index is an external financial indicator, like the London Interbank Offered Rate (LIBOR) or the Secured Overnight Financing Rate (SOFR). It’s a benchmark that lenders refer to when calculating interest rates. If your reverse mortgage is an HECM through the Federal Housing Authority (FHA), the index used is likely the SOFR. You can look at your loan paperwork to see which index is used. Your lender sets the margin. This number stays the same and won’t change during the life of your loan. When shopping for a reverse mortgage, you’ll want to compare the margin from each company and try to find a low one. After the initial period, the initial interest rate is what your lenders will refer to when calculating the new interest rate. However, that rate changes based on the index. With an adjustable rate, if the index goes up, your interest rate goes up, too. But if the index decreases, so does your interest rate.
Example of an Initial Interest Rate of a Reverse Mortgage
Let’s say you took out a reverse mortgage with a lender with a 4.875% margin. At the time of your loan initiation, the SOFR was 1.05%. To calculate your initial interest rate, your lender adds those two numbers: 4.875% + 1.05% = 5.925% With these numbers, your initial interest rate would be 5.925%. You’d keep this rate for the first index period, then your lender would recalculate by adding the new index to the stable 4.875% margin. Ask how often your interest rate gets recalculated. With this information, you can better understand how much equity you could lose over time, and how much you’d potentially owe in the future. Compounded interest isn’t the only thing that can increase your loan balance. You’ll also have servicing fees and an annual mortgage insurance premium payment. Read all the details of your loan to know what to expect.
