Nearly all home equity conversion mortgages (HECMs) today come with an adjustable-rate mortgage (ARM) option. In sharp contrast to traditional mortgage loans, reverse mortgage loan business is dominated by ARM, accounting for more than 99%. federal housing administration (FHA) backed reverse mortgages are born today.
Partly because borrowers want control How many they borrow and when They borrow from lines of credit that are open in their favor.
Fixed-rate HECMs are closed-end loans that allow only one lump sum payment to the borrower at the time the loan is financed. Taking into account the first quarter of 2024, there are only 12 fixed-rate HECM disbursements nationwide.
How is HECM ARM rate change calculated?
Each time the interest rate changes, the new interest rate on an adjustable-rate HECM is a combination of two numbers:
- lender’s deposit
- Index value
The lender’s deposit on a HECM ARM remains constant for the life of the loan. The index will change monthly or yearly. The resulting interest rate is generally rounded to the nearest eighth of a percentage point (0.125%) Ginny Mae Require (Ginnie Mae MBS Guide Chapter 35 Part J).
What index value to use?
Currently, HECM calculates the current bill rate using the weekly average of 1-year fixed maturity Treasury notes (CMT) as an index added to margin. Please remember that when rates change, we do not use the current weekly average. Instead, we use the weekly average valid for the 30 days before the exchange rate change date.
In essence, rates lag the current market by 30 days (HUD 4000.1 III.B.1.h.ii). This is done because HUD requires lenders/servicers to disclose the new note rate to the borrower in their servicing statement at least 25 days before the rate change.
For example, for a HECM loan with a rate adjustment on June 1, the index value used to calculate the June rate will be based on the weekly average 1-year CMT in effect on May 2 (the first 30 days).
Updated June 2024
Ultimately, we ended the first week of June with a weekly average 10-year CMT of 4.35%, following a 15 basis point move on the jobs report. According to reports on June 5 adenosine diphosphate The May jobs report, job growth and wage growth all declined.
While ADP cited a weakening labor market that pushed rates lower midweek, Friday’s strong May non-farm payrolls data pushed rates higher.
Illustration by Dan Holtquist. This column does not necessarily reflect the opinions of HousingWire’s Reverse Mortgage Daily and its owners.
Contact the author of this article: Dan Hultquist at: [email protected]
To contact the editor responsible for this story: Chris Clow at: [email protected]
