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Importance of Libor with Reverse Mortgages

Didier Weemaels - UnsplashIf you are interested in having a cash infusion, and you are a senior over the age of 62, then a reverse mortgage is an excellent financial product to consider. Like any other financial product offered, it is important to consider market conditions, such as LIBOR, when determining the right time to initiate the product. Each person is different, no two is similar; therefore, speaking with one of our specialists is an efficient way to determine if you qualify.<!–more–>

Reverse Mortgage vs. Traditional Mortgage

To take a step back, a reverse mortgage is a popular product for seniors to obtain funds to support their lifestyle—especially those who are cash poor and house rich. To best understand the product, one should first consider a traditional mortgage. A traditional mortgage is a debt instrument used by individuals to make real estate purchases.

For example, Charles Xavier is an adult who is married with twins on the way. Xavier, like a majority of Americans, isn’t capable of paying the entire value of the home upfront. Therefore, Xavier meets with a financial institution to secure a loan over a period of 20 years. After 20 years, and interest paid on the loan for each of those years, Xavier finally owns the property free and clear.

Xavier participated in a common practice in real estate. With hard work and determination, as well as having the ability to stay focus on a lengthy debt transaction, Xavier secure one of the best investments of today: real estate. On the flip side, a reverse mortgage is similar to a traditional mortgage, but instead of Xavier paying the lender, the lender pays him.

LIBOR RateFor instance, having surpassed the age of 62, Xavier is now retired and during his younger years, he set out a financial plan to follow once he hit retirement. The only problem that Xavier encountered, which is common among retirees, is that his wife faced adverse circumstances and in order to pay her medical bills, the couple need to find a way to pay the bills. This can be scary because despite excellent foresight in his younger years, Xavier made an error in not allocating enough capital to his and his wife’s retirement plan.

To secure funds, and on the recommendation of a financial planner, Xavier engaged in a reverse mortgage. Having work hard over the years to eventually owning his home, Xavier is now borrowing against the equity in his home, a method that allows him to receive a line of credit. This line of credit is usually determined by the value of the home. In Xavier’s case, when given the option of having a single lump sum, a regular monthly payout, or a combination of the both, he and his wife chose a regular monthly payout.

LIBOR Influences Interest Rate

Interest is only charged on proceeds received from the reverse mortgage. According to Investopedia:

Most reverse mortgages are variable interest rate loans tied to short-term indexes, such as the 1-Year Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that can add an extra one to three percentage points. Any interest compounds over the life of the reverse mortgage until repayment occurs.

LIBOR stands for IntercontinentalExchange London Interbank Offered Rate. For most of the world’s top banks, LIBOR is a benchmark rate, which acts as the first step when calculating the interest to charge other banks short-term loans.

Administered by ICE Benchmark Administration, LIBOR consist of five currencies to determine the rate, which are the following: Swiss franc, Euro, Japanese yen, pound sterling and the United States dollar. In total, 35 different LIBOR rates are used per each business day. The seven different maturities are overnight, one week, and one, two, three, six and 12 months—the three month U.S. dollar rate being the most popular.

Over the course of the loan on the home equity, Xavier will begin to owe more money to the lender. When the time comes that Xavier or his wife dies and one of the two seek to move to a new home or apartment that is better suited, then the lender sells the home to retrieve money that was loaned. This is usually a percentage of the sale, and in Xavier’s case, about 35 percent of the total value. Therefore, on Xavier and his wife’s $150,000 home, the lender—before calculating interest—would receive $52,500, while Xavier and his wife would walk away with a cool $97,500.

As is apparent, the transaction was mutually beneficial to both parties, with neither side receiving more than the other. Xavier was able to pay of his wife’s medical bills. In addition, they had the luxury of purchasing items that otherwise they wouldn’t be able to because their insurance does not cover.

Do I Qualify for a Reverse Mortgage?

In conclusion, a reverse mortgage is an excellent financial product for persons over the age of 62. The reverse mortgage, such as in Xavier and his wife’s case, allows the ability to pay off unforeseen circumstances. The cash infusion is also useful when purchasing items that are not covered by the insurance company.

When calculating the technical details, such as the interest rate, it is beneficial to be aware of the current LIBOR bench mark rate to determine if the financial product makes sense for the individual. At the moment, it is an opportune time in initiate in a reverse mortgage.

For additional questions on a traditional mortgage, a reverse mortgage, the LIBOR rate, or anything related to securing a reverse mortgage, feel free to contact one of our friendly specialists today. They can provide answers to the most difficult questions and also determine if you qualify. Their number is (888) 547-8308. The hours are Monday to Friday, 9 a.m. to 8 p.m. and Saturday to Sunday, 12 p.m. to 3 p.m. EST.

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