As interest rates rise and existing Home Equity Lines of Credit (HELOCs) near the end of their draw period, these events are creating the “perfect storm” for borrowers to get a reverse mortgage, according to a recent analysis from All Reverse Mortgage Company (All RMC).
In the years following the Recession, a combination of events have occurred that bode well for reverse mortgages, suggested Mike Branson, CEO of All RMC, in a blog post last week.
Namely, such events include the forecasted rise in interest rates economists predict for later this year; existing HELOCs that are entering a reset and repayment period; along with the difficulty in obtaining replacement HELOCs under current underwriting standards.
While these phenomena have the potential to “wreak havoc” on unprepared borrowers’ finances, Branson suggests the Department of Housing and Urban Development’s (HUD) Home Equity Conversion Mortgage (HECM) can be one solution.
“There is no time like now to take another look at the HUD HECM reverse mortgage,” Branson writes.
Take interest rates, for example. If rates rise later this year—as predicted by economists for the Mortgage Bankers Association, Fannie Mae and Freddie Mac—borrowers who have been waiting to get their reverse mortgage may be in a “big surprise,” Branson notes.
Based on how long prospective borrowers wait, that is, if they are waiting for their home value to increase or for their next birthday, they may find that the gains they anticipated may be erased by the amount the lose from higher rates, suggests Branson, who provides the following scenario.
For example, a 68-year-old homeowners with a $300,000 home would have a principal limit of $168,600 at the existing low rates. At age 69, this amount rises to $170,700, an increase of $2,100 at current rates.
“However, even with the increased age, but with a three-quarter percent raise in rate to just 5.75%, the $2,100 gain becomes $28,200 LESS,” notes Branson. “Along the same lines, it would take an increase in value of about $61,000 just to get the same benefit after the increase in rate for the 68-year-old borrower.”
Then there is the $373 billion in HELOCs, 40% of which are reaching the end of their draw period in the next three years, that can have an adverse effect on seniors’ finances.
“What this means to many senior homeowners is that line of credit you have taken for granted for so long will soon be frozen and you will have no more access to those funds if you are one of the ones who has reached the end of the draw period,” Branson writes.
Additionally, Branson notes that these affected individuals will see their payments go from interest only to full principal, while interest repayments could double or triple depending on rising rates.
Read the full All RMC analysis.
Written by Jason Oliva