Many borrowers look at a few of the important aspects of their proposed jumbo reverse mortgage. How much money will they get, How much are the fees, what is the starting interest rate but so often these are about the only items they concern themselves with.
Some borrowers also insist on getting fixed rate reverse mortgages, but the fixed rates typically insure the borrower of paying an interest rate way above the current adjustable rates available and based on the
averages of the indexes upon which the jumbo rates are ultimately determined, borrowers would have to go back over 17 years to find a historical average that would even approach making the higher fixed rates worthwhile. In other words, borrowers choosing today's jumbo fixed rates would have lost money to their adjustable counterparts as an average for more than the last 17 years.
No one can predict the future, but the last 17 years include some very volatile markets and the borrowers would still be worse off at today's low rates with a fixed rate than going through those volatile markets with an adjustable rate.
So for the borrower who is really trying to determine the lowest cost reverse mortgage for proprietary or jumbo reverse mortgage programs, they need to also review the missing element - the margin. The margin is the amount that is added to the index to determine at what rate the loan will accrue interest over the life of the loan.
In other words, two loans with the same index will accrue interest differently if one has a lower margin. Many reverse mortgages such as the Financial Freedom Cash Advantage program have a margin of 3.5%. The Independence Plan offers a 2.1% margin as an option for borrowers who are concerned with interest rates and how they will affect the future equity. The margin is the hidden factor.
The origination fee for many of the jumbo proprietary programs is around 2% of the principal lending limit, while the fee on the Independence Plan is .5% of the appraised value, which usually works out to the borrowers paying about half of the fee for the Independence Plan.
If you are considering a reverse mortgage on a jumbo or proprietary program, take a good look at the amortization schedules. Borrowers can save thousands of dollars over the years by choosing a program that accrues interest at a lower rate and this area of the decision is so often over-looked.
If your main motivation is to get the most money available and you aren't worried about the interest rates or the effects on your equity, then you should let your reverse mortgage specialist know this up front. Fixed rates also sound great, but if you have to pay high s or mid 9 percent or more to get one (today's rate on the most established fixed rate program, the Reverse Select ranges from 8.75% to 9.5%), and based on historical averages the rates never pay off by having it fixed, you have to ask yourself if the higher fixed rates are worth it.
If you look at the higher fixed rates, the amortizations schedules show the balances increasing much faster and options for receipt of the funds are usually much more restricted. But if you want a program that will give you an excellent initial draw while still accruing interest at the lowest rate possible, then the Independence Plan with the 2.1% margin may be just what you were looking for.
As a direct comparison take a look at these three actual proprietary programs available today. The Cash Account (Variable Rate), The Reverse Select (Fixed Rate), & The Independence Plan (Variable Rate). All programs use a 68Yr Borrower and a home value of $1,000,000.
Interest Rates (04/14/2008)
Cash Account 6.220%
Reverse Select Fixed 8.75%
Independence Plan 4.81%
Outstanding Balance Outstanding Balance
Proceeds Available: 10 Years 15 years
Cash Account $353,393 $637,133* $ 870,264*
Reverse Select Fixed $323,000 $778,146* $1,205,569*
Independence Plan $278,569 $465,641* $ 594,237*
*All results taken from Lender's Calculator Software
Origination FEE:
Cash Account $7,275
Reverse Select Fixed $13,500
Independence Plan $5,000
If you look at all three plans, you will see that the Independence Plan does not give the highest amount of money at closing but does have by far the lowest interest rate and Origination Fee. This means that the fees added to your initial balance will be less and the interest rate at which your loan accrues interest is also less, all adding up to much less equity erosion over time.
As stated in the article above, if your main motivation is to get the most money available (for example you need the cash to pay off an existing mortgage) and you are not concerned with the preservation of future equity, then you need to be sure to let your reverse mortgage specialist know. But if the Independence Plan works for you, it's not hard to see how much money you can save over the years with program that offers a lower origination fee combined with a lower interest rate!
