Reverse mortgage borrowers who are taking advantage of the product’s standby line of credit feature could actually see a benefit from higher interest rates, since they often have a growth rate tied to interest rates in the case of the Home Equity Conversion Mortgage (HECM) this is according to Steve Resch, VP of retirement strategies at Finance of America Reverse (FAR) in a new column published by ThinkAdvisor.
The Federal Housing Administration (FHA) ties a growth rate to mortgage interest rates on HECM credit lines, Resch explained.
“With higher rates, the available line of credit grows faster,” Resch told the publication.
This is a different result compared with clients who have other kinds of home equity loans, who are seeing available cash proceeds drop, Resch says. With a HECM, available cash that can be borrowed is increasing at a rate described as “faster than expected.”
“Say a client has $100,000 available in a line of credit with an interest rate of 3%,” Resch said. “Then, at the end of year one, using simple interest, the available line of credit would be $103,000. If the interest rates were 7%, the line of credit at the end of year one would be $107,000.”
Since interest rates used in the HECM program have increased from around 3% to around 7% since 2021, the growth rate for a reverse mortgage credit line is roughly four percentage points higher than a client may have originally expected, Resch pointed out.
This also helps solidify for Resch the importance of setting up a reverse mortgage credit line relatively early in the process.
“The formula for loan amounts is based on the age of the youngest borrower, the home value and current interest rates,” Resch told ThinkAdvisor. “While age is easy to calculate, we have no idea what home values will be like in 10 or 20 years, nor what interest rates will be. For a client who doesn’t need a reverse mortgage today, the growing line of credit option is great to put in place sooner rather than later, to allow the available line to compound over time.”
While the rate of growth is not itself an interest rate, it behaves similarly to one, Resch said.
“For example, a $100,000 line of credit, with a current interest rate of 7%, if not drawn, would grow to about $285,000 in 15 years, regardless of what has happened to the home value after the loan has been put in place,” he said.