Jan
Low Interest Rates Make Reverse Mortgages More Attractive
Written by Leo FranklinReverse mortgages are a versatile financial planning that allows home owners who are at least 62 years of age to convert home equity to cash. There are a number of advantages to reverse mortgages. You can get cash without having to find a buyer in a slow moving real estate market and you won’t be adding a monthly bill to your finances. That’s because reverse mortgages don’t require a monthly payment like a home equity line of credit does.
Even though no monthly payment is required, there are costs of a reverse mortgage. Just like with any other loan, there will be the expense of interest. In the case of a reverse mortgage, the interest costs are added to the balance due and collected when you move out of your home. That makes the current low interest rates an important benefit to consider if you are thinking about a reverse mortgage.
Our website offers a reverse mortgage calculator that illustrates how interest in charged to the loan, and how much you can qualify for.
More info on reverse mortgage interest rates
Reverse mortgages are available with a fixed or variable rate. The variable rate in the illustration is based on LIBOR, the London Inter-Bank Overnight Rate. LIBOR is commonly used as a benchmark rate for short-term loans and some traditional adjustable rate mortgages also use LIBOR.
In early January 2012, LIBOR stood at 0.27 percent. The lender adds a 2.5 percent margin to that rate, so as a borrower, you would pay an effective interest rate of 2.77 percent. The variable rate will reset as short-term rates increase, but most economists believe that rates will stay low for at least the next two years.
The Federal Reserve has committed to keeping short-term rates near zero percent at least until 2013 and many analysts are looking for the Fed to soon extend that commitment into 2014.
The proceeds from the eventual sale of your home will pay the reverse mortgage balance and interest back. Interest is included in the payoff amount, but gains in the market value can offset those costs.
Home prices have fallen more than 30 percent in some real estate markets and a rebound is inevitable. With a reverse mortgage, you will participate in the recovery. When the home is eventually sold, the sale price will reflect the current market value. That means that gains of more than 3 percent a year in the housing market could completely offset the interest costs.
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