Are you concerned about what interest rates are going to do this year? You are certainly not alone, and many people have speculated that mortgage rates will continue to go up this year and possibly even reach 8%. That is where the “optimal rate lock” program with a Home Equity Conversion Mortgage (HECM) is a fantastic solution. Let me explain.
When you apply for a Home Equity Conversion Mortgage (also referred to as a reverse mortgage), the lender will determine how much money you will be able to borrow. The amount you can borrow is based on several factors and is dictated by FHA (Federal Housing Administration). These factors include: the age of the youngest borrower, current interest rates, the FHA maximum claim amount, and your home’s value. The amount you can borrow is a factor again set by FHA and is ultimately a percentage of your home’s value which is typically between 30-50% given current interest rates. When you sign the initial loan application, the amount you can borrow (which is called the principal limit factor) is locked-in by the lender and once again is partially determined by the interest rates at that time of the loan application.
Since the interest rate at the time you sign your loan application historically determined your available funds (along with your age and appraised value), many people try to time the application process with the market and wait for a rate drop to ensure they can access the highest percentage of their equity as possible. However, the timing is no longer as critical because of this new “optimal rate lock” program. This new optimal rate lock program, which is only available from certain lenders, allows the lender to lock, unlock, and re-lock your interest rate anytime between the time you sign the initial loan application and the time that the loan closing documents are prepared.
What this now allows lenders to do is to provide you with what I would call is a “ceiling interest rate” that protects the available funds that you can borrow, which is again called the principal limit. However, if interest rates improve and go down between the time that you sign your initial loan application to the time you close the Home Equity Conversion Mortgage (HECM), the lender can now offer you the best/ optimal interest rate available throughout that entire time frame. This new rate lock process ultimately guarantees that you will receive the best rate for your situation and the most funds available (i.e. the highest principal limit), even if interest rates drop from the time that you sign the application to the time you close your loan. Additionally, this process also protects you if interest rates go up after you sign the application, you also have the assurance that your principal limit will not go down, even if rates go up after signing your application (unless your appraisal comes back lower than what was initially estimated at the time of the application).
In conclusion, this new optimal rate lock program provides the lender and the borrowers with the best loan terms possible and allows you to not worry about timing the market with rates when you sign an application. Lastly, I want to mention that this program is only available on the adjustable-rate option with a HECM. The optimal rate lock program is not available on a fixed rate HECM or a jumbo/proprietary reverse mortgage.
