The Libor is also known as the Lindon InterBank Offered Rate. It is an interest rate that serves as the benchmark for the rate banks offer to each other. The Libor rate serves to act as the average interest rate benchmark for short-term loans among the leading banks in London and is the key estimate for interest rates in the world.
The interest rates in the United States today rely on the Libor to determine the increase or decrease on rates charged to borrowers. To determine the rate charged for a HECM reverse mortgage borrower find the 1 mo. Libor index rate and add a margin. Every month a new rate is calculated which is stated on the reverse mortgage monthly statement based on the index level for that month. The margin is stated as an annual rate and divided by 12 determines the monthly rate. For the current Libor index and HECM Margins click here
The margin for reverse mortgages change depending on the market but once the reverse mortgage loan documents are prepared it is locked in and never changes during the entire duration of the loan which could be the lifetime of the borrower.
The index is the changing factor and as the index increases, so does the interest rate charged on the balance. With conventional mortgages, the impact of higher rates could be devistating as the mortgage payment increases. With reverse mortgages higher rates result in the loan balance increasing more rapidly over the life of the loan thus reducing equity. (unless there is substantial appreaciation of the home outpacing the increase in the loan balance).
A positive point with increasing interest rates and HECM loans is the line of credit growth. Since the LOC increases at the same rate that is charged on the loan balance, there is a nice increase in that available equity line creating more financial security in retirement.
To determine reverse mortgage proceeds click here