We’ve been getting a lot of questions lately about the different indexes that are tied to the reverse mortgage products so we decided to clarify what they are and how they work. The two main indexes used right now are the CMT and LIBOR. See below for a break down of each:
CMT (Constant Maturity Treasury):
The first rate we will talk about it the CMT (Constant Maturity Treasury) which is the rate Reverse Mortgages have historically been based off of. The CMT is a weekly, monthly, or yearly average of the yields of US Government Treasury Securities that are adjusted to constant maturities.
What does this mean for the Reverse Mortgage? Essentially, it’s a constant rate that adjusts monthly that tends to move with the market.
Why is this good or bad? Well, when the market is good, the CMT rates are very consistent and that is good for borrowers. On the other hand, when the market is volatile the CMT is known to move along with it as the CMT is know to respond quickly to economic changes. Bottom line, when rates are dropping, the CMT is king. When rates are rising, there are better options.
LIBOR (London Interbank Offered Rate):
The next rate we want to examine is the LIBOR (London Interbank Offered Rate) which, though relatively new to the reverse mortgage market, is still rapidly becoming the main product amongst lenders and borrowers alike.
The LIBOR index is the base rate amount that is paid on deposits made between banks in the Eurodollar market. Sounds complicated but it’s really not. Basically when banks deposit money to each other they pay interest just like the bank pays you interest on your savings account. The rate that banks (who deal in Euros, not dollars) use to determine how much to pay each other is the LIBOR.
Why chose one rate over the other?
Right now the LIBOR is becoming the main product offered by lenders and chosen by borrowers and this is happening for good reason. The problem with the CMT is that it is heavily influenced by the Federal Reserve and the US economy. When rates are going down the CMT is great because it will change quicker than other rates and borrowers can take advantage of this decrease in rate. When rates are going back up (as they are now) the CMT will also change quicker than other rates and the borrower will lose out because of that.
The good thing is that the LIBOR rate isn’t attached to the US economy (at least not directly) so as rates change here the LIBOR stays more consistent. It has also been shown that the LIBOR stays more consistent over time than the CMT.
Bottom line, if you’re looking for the most benefit, the lowest rate, and the most stable index, LIBOR is currently the way to go.