This week, the Federal Reserve decided to raise the benchmark short-term interest rate for the second time in nearly a decade. But while the impact will be more immediate for some forms of home equity lending, the Fed rate hike will have a more muted effect on reverse mortgages.
In a move that was widely expected by investors and mortgage industry lenders, the Federal Reserve on Wednesday raised the target range for the federal funds rate to 0.50-0.75%, up from the previous range of 0.25-0.50% announced in December 2015.
Because mortgage rates tend to follow long-term bond rates, such as the 10-year U.S. Treasury note, the Fed’s move this week will indirectly impact rates for traditional mortgages like the 30-year fixed mortgage, which has already increased 50 basis points—more than double the quarter-point increase the Fed voted on this week—since the election of Donald Trump in November.
Changes to longer-term rates will have more of a direct impact on reverse mortgages compared to short-term rate increases, as longer-term rate hikes will translate into lower Principal Limit Factors for Home Equity Conversion Mortgage (HECM) borrowers.
Experts indicate that HECMs would be most affected by movement in the 10-year LIBOR rate, from an adjustable rate perspective, rather than a move in the federal funds rate.
“There’s not a cause and effect relationship between the Federal Reserve’s actions and the movement in LIBOR rates,” Bankrate.com Senior Vice President and Chief Financial Analyst Greg McBride told RMD. “If anything, movement in LIBOR rates precedes actions by the Federal Reserve.”
Home equity lines of credit (HELOCs) will feel a more immediate impact on the Fed’s decision to raise rates since most HELOCs follow the prime rate, which is based on the federal funds rate.
“Rates on home equity lines of credit are going to increase in step with what the Federal Reserve has done,” McBride said. “So borrowers will see that increase passed directly through to them, typically within 60 days.”
A quarter percentage point increase in HELOC rates likely won’t break the bank for borrowers, as a 0.25 point rise on a balance of $25,000 means an increase of a little more than $5 on a monthly payment, according to estimates from Bankrate.com. For a borrower with a $50,000 HELOC, a 0.25 increase would result in a $10-$11 monthly payment hike.
“Keep in mind this is a variable rate so you will see continued increases in 2017 and beyond if the Fed continues to raise interest rates,” McBride said.
And the Fed plans to raise rates next year, which could see possibly three rate increases likely at a clop of 0.25 percentage points apiece, according to various reports following the Federal Open Market Committee meeting this week.
In response to the Fed’s rate move, mortgage industry experts are projecting lower origination amounts for next year. For 2017, the Mortgage Bankers Association (MBA) expects total mortgage originations will decrease to $1.57 trillion, down from $1.89 trillion in 2016.
“Once we start to receive more information on any possible changes to tax, trade, or government spending policies by the Trump administration, we will reassess these estimates,” MBA wrote in an economics and mortgage finance commentary published the day after the Fed’s rate announcement.
Written by Jason Oliva