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Friday, January 9, 2009
If you were to ask me one year ago which choice for senior borrowers was the better one, between the fixed rate and the adjustable, I would have told you the adjustable with few exceptions.
Cut to the present and that isn't so much the case anymore. This is because the banks dealing in reverse mortgages keep striving to increase their take on the deal.
One year ago, the margin that banks and their investors wanted was roughly one percent. The margin is loan's profit tacked on to whatever index is used as a basis for the loan.
To help you understand in a real life example. Let's say a year ago a borrower used an ARM with it's index equaling 1%. The lender adds on 1% for its margin. Add the two together and you arrive at an actual interest rate of two percent.
Well, margins have been quickly changing. They went to 1.5% by the spring of last year, and changed to 1.75 about 3 months ago.
What do you know, Fannie Mae just informed us a new price change is coming. The margin is expected to rise at least 1/2 point in the coming days.
I have another article dealing with why the adjustable rate option is so good when it comes to reverse mortgages. It still is, but the fixed rate is becoming more and more attractive as these margins rise.
One example is if the borrower cashes out all or the vast majority of the total a possible loan immediately.
If the lender is willing to lend $100,000, if the borrower needed all of it immediately the fixed may be a better choice. The reason is, with the new margin increase, the average 15 year interest rate for the adjustable is now higher than current fixed rate.
Right now the ARM is very attractive because it's squatting down extraordinarily low. It's teasing people, but this won't last forever and it will come up to meet the average.
One other benefit to the ARM over the fixed was that lenders were giving substantially more money on the ARM. This number is not nearly so profound 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.
Cut to the present and that isn't so much the case anymore. This is because the banks dealing in reverse mortgages keep striving to increase their take on the deal.
One year ago, the margin that banks and their investors wanted was roughly one percent. The margin is loan's profit tacked on to whatever index is used as a basis for the loan.
To help you understand in a real life example. Let's say a year ago a borrower used an ARM with it's index equaling 1%. The lender adds on 1% for its margin. Add the two together and you arrive at an actual interest rate of two percent.
Well, margins have been quickly changing. They went to 1.5% by the spring of last year, and changed to 1.75 about 3 months ago.
What do you know, Fannie Mae just informed us a new price change is coming. The margin is expected to rise at least 1/2 point in the coming days.
I have another article dealing with why the adjustable rate option is so good when it comes to reverse mortgages. It still is, but the fixed rate is becoming more and more attractive as these margins rise.
One example is if the borrower cashes out all or the vast majority of the total a possible loan immediately.
If the lender is willing to lend $100,000, if the borrower needed all of it immediately the fixed may be a better choice. The reason is, with the new margin increase, the average 15 year interest rate for the adjustable is now higher than current fixed rate.
Right now the ARM is very attractive because it's squatting down extraordinarily low. It's teasing people, but this won't last forever and it will come up to meet the average.
One other benefit to the ARM over the fixed was that lenders were giving substantially more money on the ARM. This number is not nearly so profound 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
7:53 PM
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