1/1/2021 UPDATE: In 2021, the reverse mortgage industry will be transitioning to the CMT index instead of the LIBOR. The LIBOR is to be phased out across all financial markets by the end of 2021.
The 1-Year LIBOR Cap 5 is the most popular version of the variable-rate HECM reverse mortgage.
There are three main HECM products available in today’s marketplace: a fixed-rate HECM and two variable-rate HECMs. The fixed-rate HECM offers a fixed interest rate for the life of the loan, but proceeds are available only as a lump sum at closing. The proceeds are also commonly less than what is available through the variable-rate HECM.
The variable-rate HECM has an adjustable interest rate, but is more flexible and tends to offer more money than the fixed-rate HECM. Proceeds are available 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 same payout options. They typically offer the same amount of money as well, though that can vary somewhat depending on conditions in the financial markets.
The differences between the two “flavors” of variable-rate HECMs are in how the interest rates are structured and managed over the life of the loan:
- 1-Month LIBOR: The initial interest rate is based on the 1-Month LIBOR index. The rate can adjust (it doesn’t mean it will adjust) on a monthly basis up to a lifetime cap of 10% above the starting interest rate.
- 1-Year LIBOR Cap 5: The initial interest rate is based on the 1-Year LIBOR index and 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 because the rate is calculated based on a 12-month moving average. Even better, the lifetime rate cap is only 5% above the start rate.
The variable-rate HECM is by far the most popular between the two primary 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.