Choosing Your Adjustable Rate Option
When you select an adjustable-rate HECM reverse mortgage, you have two options for how your interest rate adjusts: monthly or annually. Understanding the differences can help you choose the option that best fits your needs.
Monthly Adjustable Rate (Monthly ARM)
With a monthly ARM, your interest rate adjusts every month based on changes in the underlying index (typically the 1-month CMT rate) plus a fixed margin. Monthly adjustments are subject to caps that limit how much the rate can change. The rate can adjust up or down by a maximum amount each month, with a lifetime cap limiting total rate changes over the life of the loan.
Annual Adjustable Rate (Annual ARM)
An annual ARM adjusts once per year on the anniversary of your loan. The adjustment is based on the 1-year CMT rate plus the lender's margin. Annual ARMs typically have both annual and lifetime rate caps, providing a level of predictability about maximum rate changes.
Rate Caps Comparison
Monthly ARMs generally have lower periodic caps but may have similar lifetime caps to annual ARMs. The monthly adjustment means smaller, more frequent changes, while the annual adjustment means fewer but potentially larger changes. Both types protect you from unlimited rate increases.
Impact on Credit Line Growth
Your credit line growth rate equals your interest rate plus the annual mortgage insurance premium rate. Since monthly ARMs adjust more frequently, your credit line growth rate also adjusts monthly. This can be advantageous in a rising rate environment, as your unused credit line grows faster when rates increase.
Which Should You Choose?
Monthly ARMs are more common and typically offer slightly lower initial rates. They provide smoother, more gradual rate changes. Annual ARMs offer more stability with only one adjustment per year. Your choice may depend on your comfort level with rate variability and your financial planning horizon.
Discuss with Your Advisor
Your reverse mortgage advisor can model both options for your specific situation, showing how different rate scenarios would affect your loan balance and available credit over time.
