In our May 2024 Reverse Mortgage Rate Report, we discuss how reverse mortgage borrowers can benefit from higher interest rates over the life of their loan. While it’s counterintuitive, one must often consider a reverse mortgage…well, reverse.
The reason, of course, is that the unused principal in an adjustable-rate Home Equity Conversion Mortgage (HECM) grows at the same interest rate as the loan balance. Therefore, those who obtain a HECM early and carefully draw down their HECM line of credit (LOC) over time will have greater borrowing power later on. Higher interest rates enhance this power.
That’s what I call “organic” Growth occurs naturally without any action on the part of the borrower. This is one reason reverse mortgages are useful in retirement planning.
However, the HECM Line of Credit (LOC) also increases when a voluntary portion is prepaid. “Prepayments” Growth has created one of the lesser-known advantages of HECM products – the flexibility to repay funds when they are not needed and withdraw them at any time.
Will voluntary prepayments increase the HECM LOC?
Yes. A voluntary prepayment with an adjustable rate HECM not only reduces the loan balance, but also provides the borrower with four potential benefits – 1) more equity, 2) reduced interest accrual, 3) more available LOC, and 4 ) Potential tax deductions (although borrowers should consult a tax professional).
However, there is widespread confusion regarding the application of down payments on reverse mortgages. When you make a down payment with a HECM loan, certain portions of the loan balance are paid off first, starting with the portion that represents mortgage insurance.
But let’s be clear – when you make a voluntary prepayment with an adjustable rate HECM, the credit limit increases, dollar to dollar, when posting a payment. This was confirmed U.S. Department of Housing and Urban Development (HUD) manual.
Please note that customers should always maintain a minimum loan balance of $100. Otherwise, the servicer can close the reverse mortgage, which will also close the LOC.
Updated July 2024
The weekly average of the 10-year fixed maturity note (CMT) used to calculate expected interest rates fell slightly from the previous quarter.
The current weekly average interest rate is 4.39%, which is added to lenders’ deposits and is effective for new loan applications between July 9 and July 15. Many changes.
Illustration by Dan Holtquist. This column does not necessarily reflect the opinions of HousingWire’s Reverse Mortgage Daily and its owners.
Contact the author of this article: Dan Hultquist at: [email protected]
To contact the editor responsible for this story: Chris Clow at: [email protected]
