Mortgage Professor: Borrowers, Don’t Wait on Reverse Mortgages

For those thinking about getting a reverse mortgage, the best time may be now, writes Mortgage Professor Jack Guttentag in a column this week. Due to the high likelihood that interest rates will rise from today’s current levels, the credit line potential on loans taken today will outweigh the potential of those taken in the future.  

The Mortgage Professor writes:

The expected rate on a HECM is used to calculate the amount the senior can draw under the different options. Seniors can draw cash, take a credit line, or receive monthly payments for life or for a specified term. The higher is the expected rate, the smaller is the amount obtainable under any of these options. 


For example, at an expected rate of 4%, which has been a common rate during 2013, a senior of 62 with a home worth $300,000 can draw an initial credit line of about $174,000. At an expected rate of 6%, the line drops to $140,000 and at 10% it falls to $54,000. 

Now is a good time to take a HECM because the probability that expected rates will decline from current levels is very low while the probability that they will rise within the next few years, perhaps steeply, is very high. The current expected rate is only slightly above the low point of 3.81%, reached in July of 2012, but it is far below the highest levels reached in earlier years. In July, 2000, it was 9.60%. 

The second interest rate on a HECM is the accrual rate, which is the rate used to calculate the interest due the investor every month, exactly the same as on a standard mortgage. The only difference is that on a standard mortgage the borrower must pay the interest due every month whereas on a HECM the interest is added to the loan balance. ….

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Written by Elizabeth Ecker

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  • Well, this is partially correct, at least in the example of 4% vs 6% or higher. But since the HUD floor is 5.0% (5.06% rounded to the nearest 1/8), an important anlaylsis is missing. That is the Tenure plan. Using the home value of $300k and age 62 and average closing costs, the monthly payment would be approximately $870 at an expected rate of 4%. At 5.06% it would be $993/mo, or alternatively $870/mo PLUS an available credit line of $21k.

    So, as expected interest rates increase from where they are generally now (assuming margins of below say 2.5%) up to 5.06%, the senior actually benefits from increasing rates. This applies to the “benefit” of a higher tenure payment or LOC, at the expense of a likely higher total deferred interest of course. This is why a monthly tenure payment calculated today is actually higher with a margin of say 3% vs 2.5%.

    Similarly, there is no difference in the available LOC with an expected rate of 4% vs 5.06%, although there is likely a higher growth factor because the note interest rate likely has a similar spread. So, interest rates rising from where they are generally today is NOT necessarily a detriment, but can be a plus. A professional RM originator should understand all of the factors before making conclusions and advising customers based on partial knowledge of the complexities.

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