Sponsored Content from SWBC: The Impact of Rising Interest Rates and Inflation on Reverse Mortgages

Chuck Mureddu has more than 30 years of combined mortgage lending experience, including appraisal management, institutional risk, loss mitigation, and whole loan exit and securitization strategies. As the Chief Valuation Officer for SWBC Lending Solutions, he is responsible for all valuation policy and process, quality assurance, and regulatory compliance.

Many borrowers are understandably nervous about facing the current economic landscape of rising interest rates, soaring inflation, and looming recession. The best way to support your borrowers is by arming them with information about how best to prepare themselves and their loved ones for an economic downturn.

A reverse mortgage is a type of home loan for borrowers aged 62 and older that is designed to support seniors living in place. In this arrangement, the homeowner (or homeowners, if it is owned jointly) relinquishes equity in their home in exchange for regular payments. These payments are then used to supplement retirement income. Unlike traditional mortgages, which decrease as you pay down the loan, reverse mortgages rise over time as interest on the loan accumulates.

With interest rates rising sharply as the Fed tries to combat inflation, many borrowers are wondering if they’ve missed the best opportunity to benefit from a reverse mortgage.

While this is a personal decision for each borrower, with inflation currently at 9.1% and interest rates expected to rise further, now is a great time to discuss this option with them.  

High Property Values

While the red-hot housing market is beginning to show signs of cooling from record highs, property values in many areas are still at one of their highest points ever. Because a borrower’s property value is one of the primary factors used to determine how much money they will receive with a reverse mortgage loan, this is a favorable condition.

However, with recent interest rate hikes and more planned for the near future, property values could soon begin to decline. While rates have already increased somewhat, they are still near the lowest rate for the Department of Housing and Urban Development (HUD) HECM line of credit program. This means they have not significantly impacted borrowers’ ability to take out this type of loan yet. 

Future Rate Hikes Could Lead to Higher Line of Credit Growth Rates

Future interest rate hikes like the ones planned for later this year could be good news for borrowers with reverse mortgages. The growth rate for the line of credit associated with a reverse mortgage factor in the MIP renewal rate and the current interest rate. This is then applied to the borrower’s unused line of credit.

So, if interest rates increase further and your borrowers have a large line available, and they have not yet borrowed, the rate increase actually helps their available line of credit grow at a greater rate on the unused portion of the line.

For example, let’s say the Fed raises interest rates to 5% and your borrowers haven’t taken the funds yet. They are not accruing interest, but their line of available credit to you is growing at 5.5% (5% plus 0.5% MIP accrual on the unused line).

If interest rates fall later, your borrowers keep the additional funds available in their line of credit. If they never use the funds, they will never accrue interest on them, but if your borrowers end up needing this money to cover expenses, it is available.

Differences Between a Traditional Line of Credit and HECM Line of Credit

With a traditional home equity line of credit (HELOC), borrowers have secured access to the line of credit for as long as there are funds in their line.

With a reverse mortgage, the borrower keeps up the terms of the program. Unlike the HELOC, that means they do not have to worry about the line of credit being frozen, as happened to many borrowers during the 2008 housing crisis.

Your borrowers’ line of credit cannot be frozen with a reverse mortgage. As long as they adhere to the loan terms, reside in the home, are current on their property taxes, carry insurance, pay property charges on time, and maintain the home, your borrowers will always have access to these funds.

Reverse Mortgages Offer Flexible Investment Protection

A reverse mortgage can give your borrowers flexibility because it gives them access to funds they can opt to repay at any time without penalty or on which they can make no repayments for as long as they reside in the home.

With other investments, your borrowers may lock themselves into losses by selling when the market is down. With a reverse mortgage, this does not happen and your borrowers can decide how much of their line of credit to access. They can also decide to make early or make no mortgage payments and let the home sale pay off the loan when it is sold.

Talking to Your Borrowers About Reverse Mortgage Options

Each borrower’s situation is unique and reverse mortgages are not the best option for everyone. If this type of home loan best suits your borrowers’ needs, however, now is a good time to talk to them about it.

If history is any indication, home values will decrease as interest rates continue to rise. Higher rates mean borrowers would receive less money for future reverse mortgage loans. With more rate hikes predicted for the rest of the year, now may be the best time for your borrowers to take advantage of this loan type.

At SWBC Lending Solutions, we are advocates for living in place and have designed policies around reverse mortgages to help ensure our clients’ borrowers have a positive experience. Visit our website to learn more.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)