Fixed Rate Possibly Better than Adjustable in Reverse Biz
Suppose a borrower came to me 1 yr. ago with the question: "Should I go with the adjustable or fixed rate?" My reply in most situations would be that the adjustable rate is the way to go.
But since lenders in reverse mortgage backed securities are wanting more payoff than ever, people in the mortgage industry are beginning to think twice about this.
The margin that banks and their investors needed was at approximately 1% at this time last year. Go ahead and liken the "margin" to "profit margin". It is the profit in the loan.
So, if the borrower went with the LIBOR index which may be 1%, and the former margin was 1%, the interest rate would equal the index plus the margin (1% + 1% = 2%).
What's changed over the last year is this margin. By April of last year margins went to 1.5%. In the fall they upped again to 1.75%.
Well, it's on the move again. It appears Fannie Mae is telling us preemptively that the expected margin next week will raise up about one half point next week.
There are many reasons why the ARM is such an attractive reverse mortgage option. In fact I wrote an article dedicated to it, but these changes are cutting into the weight of my arguments.
For example, when a senior borrower closes on the reverse mortgage, he has the option of taking as much or little of his allotment as he chooses. What if he takes a lot?
Let's say the lender will allow the borrower to cash out a large number like $200,000. If the seniors takes it all the fixed may be better than the ARM. The reason is the fixed rate is roughly the same as the fifteen year average for the ARM.
Yes, it is true that the ARM is at an unbelievably low point right now, but we're realists and we know this sucker is going up sooner or later.
Another thing is the amount of money a reverse mortgage lender would lend to a borrower using an adjustable rather than a fixed was more pronounced than it is today.
The ARM used to be a no brainer in terms of how much money it gave a borrower rather than the fixed. It's far closer now and one never knows. Perhaps after the change the fixed will give more.
We don't know quite yet, but the fixed rate is gaining on the ARM.
But since lenders in reverse mortgage backed securities are wanting more payoff than ever, people in the mortgage industry are beginning to think twice about this.
The margin that banks and their investors needed was at approximately 1% at this time last year. Go ahead and liken the "margin" to "profit margin". It is the profit in the loan.
So, if the borrower went with the LIBOR index which may be 1%, and the former margin was 1%, the interest rate would equal the index plus the margin (1% + 1% = 2%).
What's changed over the last year is this margin. By April of last year margins went to 1.5%. In the fall they upped again to 1.75%.
Well, it's on the move again. It appears Fannie Mae is telling us preemptively that the expected margin next week will raise up about one half point next week.
There are many reasons why the ARM is such an attractive reverse mortgage option. In fact I wrote an article dedicated to it, but these changes are cutting into the weight of my arguments.
For example, when a senior borrower closes on the reverse mortgage, he has the option of taking as much or little of his allotment as he chooses. What if he takes a lot?
Let's say the lender will allow the borrower to cash out a large number like $200,000. If the seniors takes it all the fixed may be better than the ARM. The reason is the fixed rate is roughly the same as the fifteen year average for the ARM.
Yes, it is true that the ARM is at an unbelievably low point right now, but we're realists and we know this sucker is going up sooner or later.
Another thing is the amount of money a reverse mortgage lender would lend to a borrower using an adjustable rather than a fixed was more pronounced than it is today.
The ARM used to be a no brainer in terms of how much money it gave a borrower rather than the fixed. It's far closer now and one never knows. Perhaps after the change the fixed will give more.
We don't know quite yet, but the fixed rate is gaining on the ARM.
posted by Credit Counseling at
8:02 PM
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