A growing concern among a number of seniors is how much mileage they can get out of their retirement funds, or whether the amount they have worked years for will be enough to live comfortably.
Seniors can seek insurance in the form of a Home Equity Conversion Mortgage (HECM), says Inman’s “Mortgage Professor” Jack Guttentag, in detailing that taking such a route relies on education and resilience to ensure seniors’ nest eggs are insured, along with an acceptance of the adjustable rate product.
While many borrowers fear adjustable-rate mortgages because rising rates increase the mortgage payment, that is true only on standard mortgages. On a HECM there is no required payment, and rising rates increase the growth of an unused credit line. Seniors using the HECM to insure against the possibility that their financial assets will run out benefit from rising rates.
Given the borrower’s age and property value, the amount that can be drawn on a HECM depends on the interest rate and the property appreciation rate: the lower the interest rate and the higher the appreciation rate, the larger the draw.
HUD assumes a property appreciation rate of 4 percent, which has been the average over many decades, and does not adjust for changes in the economy.
The interest rate used, however, termed the “effective rate,” is a market rate that adjusts every week and is now below the floor of 5 percent set by HUD/ It can go no lower, but it can go higher, and it will in time.
The bottom line is that initial credit line draws are now at their peak, and the rate of increase in credit lines will accelerate when interest rates start to rise. The time to take a HECM is now.
Written by Jason Oliva