When going forward with a reverse mortgage the borrower has multiple options. The line of credit is, by far, the number one option and for good reason.

The reason for this article is to let you know about the margin increase taking place (within 7 days) in the reverse mortgage industry. This increase will be by at least .5%

You may be asking what is the margin? Glad you asked. The margin is the profit the bank or more particularly the banks investors charges on the loan.

For example, most borrowers, in the reverse mortgage arena, were moving forward with the constant maturity treasury based line of credit. The constant maturity treasury is simply an index or basis for the loan.

Last week the constant maturity treasury index was .40%. The margin banks were charging was 1.75%. This is the mortgage company profit. So, the actual interest rate was the margin plus the index totaling 2.15%.

We received word yesterday that Fannie Mae, the body securitizing these loans on the secondary market, has indicated this margin is going up a minimum of 1/2%.

The effects on borrowers will be fairly limited. We’ve had the good fortune of rates being so low they are below the FHA floor rate which determines how much money a borrower may cash out.

Rates are tied to how much a borrower can borrow. When rates are higher they get less. And vice versa. Well, when they hit a certain low rate (FHA floor), any rate below that will not get the borrower more money.

At current standing the floor rate is high above us. This means the marginal increase, thankfully, will not put reverse mortgage borrowers above it. So it is still fine to use a estimate given to you in the last couple weeks.

What the margin increase will do is eat into equity a little faster. This is one of the downsides to the reverse mortgage. The up side is the borrower doesn’t have to make payments.

So the bad news is interest is gathering against property equity. This increased marginal charge will just have it gather slightly faster.