Traditionally, first-time reverse mortgage seekers have navigated multiple conventional mortgage loans, emphasizing the importance of the interest rate due to its direct impact on monthly payments and long-term interest expenses. This preference put reverse mortgage originators at a disadvantage, as they often offered HECM rates exceeding those of standard 30-year fixed mortgages. However, recent spikes in mortgage interest rates have nearly leveled the playing field.
Yet, focusing solely on the rate when selling a reverse mortgage is myopic and ineffective. It overlooks the remarkable flexibility and unique advantages offered by HECMs. One standout feature is the escalating credit line or available principal limit, which augments a homeowner’s borrowing capacity, compounding month by month and year by year.
In our video Why 8% 30-year fixed rates may benefit reverse lending Jeff Niccum commented, “The high-interest rate environment is providing for much faster LOC growth! Those with a mortgage balance can make voluntary payments which reduces the amount of interest accruing which also increases the available LOC which grows at 8%. A double-barrelled benefit! Those with free and clear houses can take out a reverse and only accrue interest on the fees while the remaining PL is in the available LOC which will grow at 8% compounded monthly.“
Unlocking the Power of HECMs in a High-Interest Environment:
In today’s landscape, all adjustable-rate Home Equity Conversion Mortgages (HECMs) rely on the 10-year Constant Maturity Treasury rate plus the lender’s margin to determine the expected rate. Depending on the lender’s pricing, the typical HECM borrower might anticipate a starting/expected rate between 7.5-8.0% (as of October 30, 2023). While this can address concerns that reverse mortgages may be perceived as ‘too costly,’ it does impact the available funds a borrower may be eligible for.
However, homeowners with a minimal or non-existent outstanding mortgage balance reap the greatest rewards in this high-interest scenario. With a starting line of credit at $100,000 and an average growth rate of 8% (comprising 7.5% plus 0.5% FHA mortgage insurance premium), a homeowner could potentially access $108,000 in just one year or $127,000 in three years. What’s more, those who make partial payments could expand the baseline available principal limit, to which the growth rate is applied.
HECM vs. Traditional HELOC:
Compared to a traditional Home Equity Line of Credit (HELOC), the HECM’s line of credit offers unparalleled advantages. First, unlike a HELOC, a HECM’s line of credit remains impervious to reduction or freezing in adverse market conditions, such as declining home values. This lesser-known practice in banking, adjusting the limit based on the home’s existing or projected remaining equity, is how banks mitigate their risk in declining markets.
Moreover, even homeowners with commendable credit and established lender relationships may struggle to qualify for a HELOC, as banks continue to tighten their lending standards. Considering these factors, why would an older homeowner opt for a HELOC? The likely reason is that they are unaware of the alternative—one that doesn’t necessitate monthly payments or carries the risk of losing their credit line.
While there is an initial cost associated with securing such a flexible home mortgage, when weighed against the enduring benefits of a secure credit line without mandatory payments, the adjustable-rate HECM emerges as the superior choice. It’s essential to note that only the available line of credit grows, so those who have depleted or never had a line of credit would not experience a growth rate from zero.