Reverse Mortgage Glossary
Caps are limits placed on the initial interest rate (IIR) of the variable-rate HECM reverse mortgage to regulate how much the interest rate can increase between rate adjustments and over the life of the loan. Caps allow the IIR (the actual note rate) to increase, but only within certain limits at each change and over the lifetime of the reverse mortgage.
The variable-rate HECM generally comes in two flavors, the 1-Month LIBOR and the 1-Year LIBOR. Both loan products offer the exact same options for distribution of proceeds (lump sum, line of credit, term, tenure, modified term, modified tenure, etc.) and the same benefit amount. The differences between the two are in how the initial interest rate and caps are structured:
- 1-Year LIBOR Cap 5: The IIR likely will start off higher than the 1-Month LIBOR, but can only increase once per year a maximum of 2% above the start rate and has a lifetime rate cap of 5% above the start rate.
- 1-Month LIBOR: The IIR will likely start off lower than the 1-Year LIBOR Cap 5, but it can adjust monthly a maximum of 10% above the start rate up to a lifetime cap of 10% of the start rate.
Though the IIR starts off a little higher, the 1-Year LIBOR Cap 5 is probably the more popular of the two options in today’s reverse mortgage marketplace. Borrowers seem to like the added the protection that comes with the lifetime cap of 5% above the start rate.
Was This Informative? Please Share!
Download a FREE Report About the HECM
Get the straight deal on what a HECM is, how it works, and how it can help you live better in retirement. Enter your email address below and click 'Download'.
We respect your privacy and won't spam you. You can unsubscribe at any time.