Reverse Mortgages are impacted by Higher Interest Rates but valuable option for 62 years and older

March 26, 2024
Reverse Mortgages are impacted by Higher Interest Rates but valuable option for 62 years and older

Just as homeowners or potential homeowners with conventional mortgages dread higher interest rates, the same sentiment extends to individuals with or contemplating Home Equity Conversion Mortgages which are better known as reverse mortgages.

First, How does a Reverse Mortgage work?
Reverse mortgage loans empower individuals aged 62 or older to utilize their home equity as a revenue stream without the need to relocate. The borrowed amount, along with interest, must be repaid upon the sale of the house or the borrower's passing.  This type of mortgage allows homeowners to convert accumulated equity into cash which can be used to just pay off an existing mortgage, fund home improvements, cover medical costs, or provide a cushion to cover everyday expenses to remain in the house. Although it can be a bit intimidating to have to think about a mortgage again, don't worry... as part of the process you will speak with a financial counselor.Counselors cover a number of required topics including eligibility, loan amounts, loan limits, and impacts on family and heirs. Home Equity Conversion Mortgages have become a vital part to estate planning for many adults.

Rising interest rates pose several challenges:

Existing reverse mortgage holders (or their heirs) face heightened debt as interest rates climb.
Prospective borrowers encounter reduced borrowing capacity against their home equity due to the impact on the "principal limit factor," determined by factors such as the borrower's age, property value, and interest rate. This factor ensures that the owed amount doesn't exceed the home's value, with higher interest rates translating to higher overall debt. As interest rates surge, the loan balance escalates, prompting lenders to offer lower initial loan amounts. For instance, where homeowners might have previously accessed 50% of their home equity, they might now only be eligible for 35%.

For example, a homeowner in Closter, New Jersey with a $700,000 property who could previously secure a $350,000 reverse mortgage. With current limitations, their potential loan amount might shrink to $245,000.

While 30-year fixed-rate mortgages hover around 6.8%, reverse mortgages often command even higher rates.

Despite the deferred repayment timeline for most reverse mortgages, the accelerated rise in owed amounts due to higher interest rates remains a concern. Since most reverse mortgages feature adjustable rates, the impact of interest rate hikes materializes within months, swiftly eroding the principal.