Reverse Mortgage Glossary
1-Year LIBOR Cap 5
The 1-Year LIBOR Cap 5 is the most popular version of the variable-rate HECM in today’s reverse mortgage marketplace. Seniors prefer the Cap 5 because it tends to offer more stability, versatility, and cash than other HECM reverse mortgage options.
Three main HECM products
There are three main HECM products available in today’s reverse mortgage marketplace: a fixed-rate HECM and two variable-rate HECMs.
The fixed-rate HECM offers a fixed interest rate, but proceeds are only available as a lump sum at closing. Proceeds are commonly less than the variable-rate programs. The interest rate is typically higher than the variable-rate HECMs because the bank is guaranteeing it will never change over the life of the loan.
The variable-rate HECMs are more flexible. They offer proceeds in the form of a lump sum, line of credit, term or tenure income, or some combination of all of these.
How the LIBOR Cap 5 works
Both variable-rate HECMs offer the exact customization and payout options. They typically offer the same amount of money as well, though that can vary depending on investor demand. The differences are how the rate is structured and how it’s managed over the life of the loan.
- 1-Month LIBOR: The interest rate is based on the 1-Month LIBOR index. The rate can adjust on a monthly basis up to a lifetime cap of 10% above the start rate.
- 1-Year LIBOR Cap 5: The interest rate is based on the 1-Year LIBOR index. The rate can adjust to a lifetime cap of 5% above the start rate.
The interest rate on the Cap 5 tends to start off a little higher than the 1-Month LIBOR, but it’s more stable and the lifetime rate cap is only 5%.
The variable-rate HECM is by far the most popular between the two main HECM products. The Cap 5 is the most popular of the two variable-rate HECMs, so it’s pretty much the dominant HECM product on the market today.