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When high HECM interest rates are a selling point

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Traditionally, first-time reverse mortgage seekers have navigated multiple conventional mortgage loans, emphasizing the importance of the interest rate due to its direct impact on monthly payments and long-term interest expenses. This preference put reverse mortgage originators at a disadvantage, as they often offered HECM rates exceeding those of standard 30-year fixed mortgages. However, recent spikes in mortgage interest rates have nearly leveled the playing field.

 

Yet, focusing solely on the rate when selling a reverse mortgage is myopic and ineffective. It overlooks the remarkable flexibility and unique advantages offered by HECMs. One standout feature is the escalating credit line or available principal limit, which augments a homeowner’s borrowing capacity, compounding month by month and year by year.

 

In our video Why 8% 30-year fixed rates may benefit reverse lending Jeff Niccum commented, “The high-interest rate environment is providing for much faster LOC growth! Those with a mortgage balance can make voluntary payments which reduces the amount of interest accruing which also increases the available LOC which grows at 8%. A double-barrelled benefit! Those with free and clear houses can take out a reverse and only accrue interest on the fees while the remaining PL is in the available LOC which will grow at 8% compounded monthly.“

 

Unlocking the Power of HECMs in a High-Interest Environment:

 

The HECM”s line of credit growth rate is a little-known benefit of the adjustable rate Home Equity Conversion Mortgage

In today’s landscape, all adjustable-rate Home Equity Conversion Mortgages (HECMs) rely on the 10-year Constant Maturity Treasury rate plus the lender’s margin to determine the expected rate. Depending on the lender’s pricing, the typical HECM borrower might anticipate a starting/expected rate between 7.5-8.0% (as of October 30, 2023). While this can address concerns that reverse mortgages may be perceived as ‘too costly,’ it does impact the available funds a borrower may be eligible for.

 

However, homeowners with a minimal or non-existent outstanding mortgage balance reap the greatest rewards in this high-interest scenario. With a starting line of credit at $100,000 and an average growth rate of 8% (comprising 7.5% plus 0.5% FHA mortgage insurance premium), a homeowner could potentially access $108,000 in just one year or $127,000 in three years. What’s more, those who make partial payments could expand the baseline available principal limit, to which the growth rate is applied.

 

HECM vs. Traditional HELOC:

Compared to a traditional Home Equity Line of Credit (HELOC), the HECM’s line of credit offers unparalleled advantages. First, unlike a HELOC, a HECM’s line of credit remains impervious to reduction or freezing in adverse market conditions, such as declining home values. This lesser-known practice in banking, adjusting the limit based on the home’s existing or projected remaining equity, is how banks mitigate their risk in declining markets.

 

Moreover, even homeowners with commendable credit and established lender relationships may struggle to qualify for a HELOC, as banks continue to tighten their lending standards. Considering these factors, why would an older homeowner opt for a HELOC? The likely reason is that they are unaware of the alternative—one that doesn’t necessitate monthly payments or carries the risk of losing their credit line.

 

Conclusion:

While there is an initial cost associated with securing such a flexible home mortgage, when weighed against the enduring benefits of a secure credit line without mandatory payments, the adjustable-rate HECM emerges as the superior choice. It’s essential to note that only the available line of credit grows, so those who have depleted or never had a line of credit would not experience a growth rate from zero.

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Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
Readers wishing to submit stories or interview requests can reach our team at: info@hecmworld.com.

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7 Comments

  1. It’s not that I disagree with your point, obviously the higher growth rate on a LOC today is an advantage when compared with 4, 5, or 6 percent. However, the current situation has in many ways, made the HECM into a loan of last resort for those with free and clear, or close, homes, which is the opposite of what I was saying two years ago. It’s hard to recommend unless there aren’t options for the borrower. In addition, there are CDs paying 7 percent and many paying six plus, so it’s not like the growth rate on the LOC is the only game in town. And the proprietary jumbos are essentially worthless. Before the HECM can recover, it needs higher principal limits and lower rates. Until that time, I fear it will remain where it sits. (I saw recently that the theme at the MBA’s recent conference was “survive until 25,” and I hope that’s not being optimistic.) Buckle up, it’s going to be a bumpy ride.

    • Use of the growing line of credit feature on a free and clear home only means the line of credit is available. It doesn’t have to be used! As the available credit grows larger and larger, it can potentially grow large enough to exceed the FMV of the home (the earlier one starts this the more realistic this possibility). Since this is a “non-recourse” loan, the individual never owes it – the house owes it! In fact the LOC doesn’t even show up on a credit report. If there is a housing bubble crash similar to 2009, and the LOC has grown to a point that it exceeds the FMV of the home, all of the funds may still be taken out at any time with no tax ramifications and no required repayment. If the house is sold, and the mortgage balance exceeds the FMV, the FHA is required to make up the difference to the lender. The HECM LOC minimizes downside risk and creates an ever-growing “equity floor.”

  2. Shannon,

    I feel at this point in time, the growth rate percentage of a line of credit is a major sales advantage for the reverse mortgage. This article was very appropriate for the times we are living in and facing in today’s environment

    Good luck all,

    John A. Smaldone!

    • Thank you, John! A viewer comment spurred the idea.

  3. I’ve had several Borrowers recently take out HECM’s simply for the LOC play. These Borrowers had no mortgage. The LOC in 10 – 15 years is extremely compelling. One of them is even going to pay down the closing costs so as to have minimal interest accruing. Re: CD’s and their comparable rates: while true that their rates are good, the HECM isn’t tying up cash (other than the closing costs). So invest your cash in those CD’s AND open a HECM too.

    • Thank you, Dave. That’s a strategic use of securing one’s future borrowing power. Great story!


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