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Interest Rates

Background Information

There are various types of interest rates that apply to the reverse mortgage loans.

Expected Interest Rate

The expected interest rate is the rate that is used to calculate the principal limit.

In practice, the expected interest rate is generally the 10-year CMT (Constant Maturity Treasury) rate plus a margin (if the loan is adjustable). See more on expected rates.

Initial Interest Rate

The initial interest rate is the rate that the borrower is actually charged.

In practice, the initial interest rate is generally the 1-year CMT (Constant Maturity Treasury) rate plus a margin (if the loan is adjustable).

Adjustable Rate Loans

Adjustable rate loans have two components:

  • Margin - The margin is a fixed number that is added to the index to determine the interest rate.
  • Index - The index is a variable number that is based on a financial index, such as the LIBOR or the CMT (Constant Maturity Treasury).

The sum of the index and the margin are the fully indexed rate.

Interest Rate Caps

Adjustable rate loans have interest rate caps that limit how much the interest rate can change at each adjustment period and over the life of the loan.

  • Periodic Rate Cap: The maximum increase in the interest rate at each subsequent adjustment.
  • Lifetime Rate Cap: The maximum interest rate that can be charged over the life of the loan.

Example The initial rate is 6%. The loan has a lifetime cap of 5%. The interest rate can never exceed 11%.

Interest rate caps can be configured in the product settings for each product.

Fixed Rate Loans

For fixed rate loans, the initial rate is always the same as the expected interest rate.

Definitions Within HECM Class

initial_index_rate is the initial index. It does NOT include the margin.

initial_rate is the initial interest rate. It DOES include the margin.

expected_rate is the expected interest rate. It DOES include the margin.

initial_rate_fully_indexed is the initial rate plus the margin. It DOES include the margin.

initial_interest_rate is the initial interest rate. It DOES include the margin.

Note that there is no "initial margin" or "expected margin" in the HECM class. This is because the margin, by definition, is fixed and cannot change. The margin will always be the same between the initial rate and the expected rate.