Pricing of HECM Reverse Mortgages
May 21, 2015, Revised October 24, 2015, March 27, 2017
The Two Interest Rates
HECM reverse mortgages are unique in using two interest rates in every transaction. One interest rate is used in calculating the borrower’s future debt and future credit line if there is one. This is the “mortgage rate” and it is comparable to the rate on standard mortgages, although there is no credit line on standard mortgages.
The second interest rate is called the “expected rate” and it is the rate used in determining draw amounts – the higher the expected rate, the less the senior can draw. HUD as the insurer of HECMs defines the relationship between expected rates and draw amounts.
If the borrower elects a fixed rate, the mortgage rate and the expected rate are the same, but if the borrower selects an adjustable rate, the two will differ. During the years of very low rates, the expected rate was consistently higher than the mortgage rate.
To borrowers, the expected rate is
relevant only at the beginning. Once the loan is closed,
only the mortgage rate comes into play.
To borrowers, the expected rate is relevant only at the beginning. Once the loan is closed, only the mortgage rate comes into play.
The mortgage price is the rate and the lender's
origination fee.On one adjustable rate version, the
rate adjusts monthly subject to a 10% lifetime adjustment
cap. On another version, the rate adjusts annually subject
to a 5% lifetime adjustment cap. Within each loan
type, lenders offer multiple combinations of interest rate
and origination fee, which they vary with the size of the
initial loan amount. The larger the initial loan amount, the
lower the price. Here are a few examples for fixed-rate
· Initial loan $40,000, interest rate 4.25%, fee $2975
· Initial loan $200,000, interest rate 4.25%, fee 0
· Initial loan $200,000, interest rate 5.06%, rebate $7,000
Locking the Price
The expected rate is locked as soon as the loan application has been submitted to FHA. The mortgage rate, however, is not locked until all processing has been completed, the property has been appraised, and the borrower has been counseled, which typically takes multiple weeks during which time HECM rates may change – the practice is to reset rates to the market every week.
The upshot is that borrowers draw the amounts they were promised, but the rate they were quoted may be different. Under these circumstances, lenders should lock at the rate they would quote to a new shopper with the identical transaction, but whether they do or not nobody knows. The temptation to pad the closing price must be very strong, especially when market rates have gone down and they can pad the current price while delivering the price they had quoted earlier.
HECM lenders who pad the final closing price are not likely to encounter any resistance from the borrower. Probably most borrowers focus on the draw amount, which conforms to what was promised. Further, unless the borrower is dealing with one of the lenders who post their prices on this site, there is no simple way to check the price.