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Reverse Mortgage Glossary

Expected Interest Rate, EIR

Expected interest rate, or EIR, is an interest rate value used to calculate the amount of proceeds initially available to a HECM reverse mortgage borrower.

For Calculation Purposes Only

EIR is used for calculation purposes only and is not always equal to the actual interest rate on a reverse mortgage. Initial interest rate, or IIR, is the actual interest rate at which interest accrues on an annual basis.

The EIR and age of the youngest borrower is used to find a principal limit factor in a table published by FHA. The principal limit factor is then multiplied by the maximum claim amount (equal to the appraised value for most borrowers) to determine the principal limit, which is total initial amount of proceeds available to the borrower.

As an example, let’s assume the maximum claim amount is $300,000 and the PL factor is 0.50 based on the youngest borrower’s age and the expected interest rate (EIR). The PL factor is multiplied by the maximum claim amount to arrive at an initial proceeds amount of $150,000 (0.50 * $300,000), which is the principal limit. These proceeds would then be divvied up to cover existing mortgage balances, closing costs, required property charges, and any allocations to the borrower in the form of cash or line of credit.

You’ll see both the EIR and the IIR on the loan documents and disclosures from your lender, so it’s important to realize that interest accrues at the rate specified by the IIR, not the EIR. Again, the EIR is only used to calculate the amount of money you can receive from the reverse mortgage.

An Assumption About Future Rates

EIR is essentially a assumption about where interest rates are likely to be in future years. If rates are higher, then interest accrues faster on the reverse mortgage balance, which increases the risk that the loan balance could exceed the value of the home. This means that FHA will have to settle part of the loan if the home isn’t worth enough to cover the entire balance. Obviously, FHA doesn’t want to have to settle too many claims against the mortgage insurance fund or it quickly becomes insolvent. Because of this, PL factors tend to decrease as EIR increases. In other words, reverse mortgage borrowers tend to qualify for less money if the expectation (expressed via EIR) is that rates are going to be significantly higher in the future.

To see how EIR impacts reverse mortgage proceeds, let’s take a look at a few different examples of PL factor/EIR combinations for an 80-year old borrower. This is based on the principal limit factors table published in August, 2014.

The following example is based on an EIR of 5.00%:

  • Maximum Claim Amount: $300,000
  • Age: 80
  • EIR: 5.00%
  • PL Factor: 0.776
  • Principal Limit: $232,800 (0.776 * $300,000)

Now if rates appear to be on the rise and the expected interest rate hits 7.00%, let’s see what happens:

  • Maximum Claim Amount: $300,000
  • Age: 80
  • EIR: 7.00%
  • PL Factor: 0.674
  • Principal Limit: $202,200 (0.674 * $300,000)

As you can see, a increase of 2% in the EIR results in a reduction of over $30,000 in reverse mortgage proceeds. This is why reverse mortgages are a particularly lucrative option for seniors when interest rates are historically low.

The EIR tends to equal IIR for the fixed rate reverse mortgage program. EIR tends to be higher than IIR for the variable rate reverse mortgage program because the expectation is that rates could increase in the future, which means the variable rate HECM will accrue interest at a faster rate than when the loan was originated.

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