The CMT Monthly Cap 5 is the most popular HECM reverse mortgage available today.
You may also hear industry professionals refer to the CMT Monthly Cap 5 as the “CMT Cap 5” or simply the “Cap 5”.
There are two main HECM products available in today’s marketplace: the fixed-rate HECM and the variable-rate HECM.
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 usually less than what is available through a variable-rate HECM.
The variable-rate HECM has an adjustable interest rate, but it’s 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 options.
The variable-rate HECM is more popular than the fixed-rate HECM because it’s more flexible and tends to offer significantly more money.
The variable-rate HECM used to be based on the LIBOR index, but the LIBOR was phased out and replaced with the CMT index back in 2021.
How the CMT Monthly Cap 5 works
Most reverse mortgage lenders offer two variable-rate HECMs that come with the exact same payout options. The difference between the two is in how the interest rates are structured and managed over the life of the loan:
- CMT Monthly Cap 5: The interest rate is based on the 1-Month CMT index. The rate can adjust (it doesn’t mean it will adjust) on a monthly basis up to a lifetime cap of 5% above the starting interest rate.
- CMT Monthly Cap 10: The interest rate also adjusts monthly based on the 1-Month CMT index, but the lifetime cap is 10% above the start rate.
So, why would somebody go with the CMT Monthly Cap 10 over the CMT Monthly Cap 5? Why would somebody want the higher rate cap? Great question!
The Cap 10 can be appealing because it often comes with a lower starting interest rate. Basically, the lender is willing to give you a lower rate if you’re willing to accept more potential interest rate volatility over the life of the loan.
Having said that, nobody really goes with the Cap 10 product these days. The interest rate usually isn’t that much better than the Cap 5 rate, so it makes sense to just go with the Monthly CMT Cap 5.
The CMT Monthly Cap 5 is the most popular variable-rate HECM these days because of the tighter cap on the interest rate.
How the CMT Index Impacts Reverse Mortgage Rates
The interest rate on a HECM reverse mortgage is called the initial interest rate.
Lenders calculate the initial interest rate for a variable-rate HECM by adding a margin to the index (which is the monthly CMT in this case).
For example, if the CMT index is 3.00% and the margin is 2.50%, the fully-indexed initial interest rate is calculated as follows:
3.00% (index) + 2.50% (margin) = 5.50% (initial interest rate)If the CMT index increases, the initial interest rate increases as well. This means interest accrues onto the loan balance faster.
If the index decreases, the initial interest rate also decreases. This means interest accrues at a slower rate onto the loan balance.
The margin is set by the lender during the application process and never changes throughout the life of the loan.
However, the index does change over time, which is why the rate on a variable-rate HECM changes over time as well.
Note that there is no index for the fixed-rate HECM. The initial interest rate is set at application for the life of the loan.
