The HECM reverse mortgage offers fixed and adjustable interest rates. The fixed-rate program comes with the security of an interest rate that does not change for the life of the reverse mortgage, but the interest rate is usually higher at the start of the loan than a comparable adjustable-rate HECM. Adjustable-rate reverse mortgages typically have interest rates that can change on a monthly or yearly basis within certain limits.
Applicants for a HECM reverse mortgage will likely notice that there are two different interest rates disclosed on their loan documents: the initial interest rate, or IIR, and the expected interest rate, or EIR.
Initial interest rate (IIR)
The initial interest rate, or IIR, is the actual note rate at which interest accrues on the outstanding loan balance on an annual basis. For fixed-rate reverse mortgages, the IIR can never change. For adjustable-rate reverse mortgages, the IIR can change with program limits up to a lifetime interest rate cap.
Expected interest rate (EIR)
The expected interest rate, or EIR, is used mainly for calculation purposes to determine how much a reverse mortgage borrower qualifies for based on the value of the home (up to the maximum lending limit of $625,500) and age of the youngest borrower. The EIR is often different from the actual note rate, or IIR. The EIR does not determine the amount of interest that accrues on the loan balance (the IIR does that).
Amount of proceeds available
The total pool of money that a borrower can receive from a HECM reverse mortgage is called the principal limit (PL), which is calculated based on the maximum claim amount (MCA), the age of the youngest borrower, the expected interest rate (EIR), and a table to PL factors published by HUD. Similar to loan-to-value (LTV) in the forward mortgage world, the principal limit is essentially the percentage of the value of the home that can be lent under the FHA HECM guidelines. Most PLs are typically in the range of 50% to 60% of the MCA, but they can sometimes be higher or lower. The table below gives examples of principal limits for various ages and EIRs and a property value of $250,000.
Borrower’s age at originationExpected interest rate (EIR)Principal limit factor (as of Aug. 4, 2014) Initial principal limit based on MCA of $250,000655.5%0.478$119,500657.0%0.332$83,000755.5%0.553$138,250757.0%0.410$102,500855.5%0.644$161,000857.0%0.513$128,250
The principal limit tends to increase with age and decrease as the EIR rises. In other words, older borrowers tend to qualify for more money than younger borrowers, but the total amount of money available under the HECM program tends to decrease for all ages as interest rates rise.
Closing costs, existing mortgage balances, other liens, and any property taxes or homeowners insurance due are typically paid out of the initial principal limit. Any additional proceeds available can be distributed to the borrower in several ways, which will be detailed next.