In today’s financial landscape, we find both the average HECM expected rate and the traditional 30-year mortgage hovering around eight percent. In this episode, we’ll delve into why this convergence offers a distinct advantage to reverse mortgage lenders and originators.

According to Money-com, predicting whether these rates will rise above or stay at 8% is uncertain due to numerous influencing factors. Chen Zhao, economics research lead at Redfin, suggests that the possibility of rates reaching or surpassing 8% is well within the realm of possibility — potentially unsettling news for prospective homebuyers and sellers. Well, that time has already come.

In the past month, individuals with average credit and smaller down payments have already secured mortgages at rates as high as eight or nine percent.

You might wonder how record-high mortgage rates could possibly benefit reverse mortgage lenders. Firstly, over the past decade…

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the HECM’s initial expected rate and ongoing rates have surpassed those of traditional mortgage loans. This discrepancy has fostered the belief that reverse mortgages were inherently more costly. However, due to the recent surge in 30-year fixed-rate mortgages, the HECM now stands on a nearly level playing field.

Secondly, prospective homebuyers tend to focus on interest rates. With the average 30-year mortgage now at eight percent, older homebuyers might be more open to using a HECM for Purchase to transition into a new home. While the H4P demands a significantly higher down payment, it offers several distinct advantages, albeit with the caveat of upfront and ongoing mortgage insurance premiums. These advantages include the ability to avoid tying up a substantial portion of liquid assets in the new property and the flexibility to choose when to make or skip payments based on unforeseen circumstances or immediate financial needs. This helps prevent the homebuyer from falling behind on essential mortgage payments, safeguarding their credit score and future borrowing capacity for auto loans, credit cards, or other financed purchases.

Despite home values still being 25-40% higher than pre-pandemic levels, the interest in cash-out refinances has notably contracted. Few are inclined to refinance their homes for a cash-out option and double their interest rates and monthly payments to tap into their equity. This makes the HECM’s line of credit or a proprietary second reverse mortgage more appealing to budget-conscious borrowers, as it doesn’t inflate their monthly debt obligations.

Given the Federal Reserve’s vigilant stance on inflation and potential future rate hikes, it’s probable that traditional mortgage rates will remain elevated well into the next year. While these higher rates certainly shrink the available loan proceeds for reverse mortgage borrowers, the elimination of the interest rate gap between traditional and reverse mortgages could alleviate resistance to both HECM and proprietary loans.

In the grand scheme of things, as one NRMLA attendee aptly put it, “It’s just a loan.” The distinction lies in one not requiring monthly payments and potentially securing a credit line impervious to freezing or reduction.

What are your thoughts? Despite the lower principal limit factors, what advantages do you see with traditional and reverse mortgage interest rates being nearly identical? Please share your comments below.

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