As discussed in previous reverse mortgage rate updates, the federally insured Home Equity Conversion Mortgage (HECM) is the primary reverse mortgage in the United States. As a result, HECM has become synonymous with reverse mortgages.
But did you know that almost all HECMs today are floating rate loans? This is in sharp contrast to the traditional forward mortgage business, which is dominated by fixed-rate products.
Consider that 99.81% of HECMs originating in June 2024 are adjustable rate mortgages (ARMs). To put it in perspective, there are currently more monthly reports of Bigfoot sightings in the United States than flat-rate HECM.
Why variable interest rate?
There are several regulatory reasons for the popularity and dominance of HECM ARMs over the past decade. Let’s itemize six significant advantages of variable-rate HECM ARMs over their fixed-rate counterparts:
- Safety: HECM ARMs allow borrowers to keep unused funds in a line of credit (LOC). This LOC will not be frozen, reduced, or eliminated when market conditions change. As long as the loan is in good standing, you can get a LOC even if the loan balance exceeds the value of the home.
- flexibility: The HECM ARM is an open-end loan. This means that borrowers can withdraw funds when needed in an amount that meets their needs. Just borrow at any time, pay off the loan, and borrow again without restrictions after the first year.
- Optional: A HECM ARM allows borrowers to change their payment plan at any time, from increasing their line of credit to monthly or scheduled payments. Please note that a request to change your payment plan is only $20.
- Accrued expenses: HECM ARMs can minimize accrued interest when a borrower withdraws only a small amount of money needed over an extended period of time.
- Organic growth: HECM ARM’s borrowing capacity continues to grow. The available LOC will grow naturally at the same compound interest rate as the loan balance, to the borrower’s benefit. This trait is unique in the financial world. This is the main reason why reverse mortgages are useful in financial planning.
- Advance payment growth: HECM ARM borrowers can benefit from voluntary partial prepayment. These payments will increase the HECM LOC “dollar for dollar”. They will also increase a homeowner’s equity position and may result in an IRS Form 1098 tax deduction. Borrowers should consult a tax professional before making a voluntary advance.
In today’s market, where many expect interest rates to fall, HECM ARMs may also experience more favorable rates in the short term.
Updated August 2024
Over the past 38 days, the weekly average of the 10-year fixed maturity Treasury note (CMT) has fallen 38 basis points. The corresponding reduction in expected HECM interest rates provides additional funding for new HECM applications and closings in August. This would be a good time for homeowners to revisit and update their loan proposals.
The weekly average interest rate for the 10-year CMT effective August 13 was 3.91%, the lowest rate so far this year. This brings optimism to the third quarter, which will require increased loan production. The 1-year CMT also follows this downward trend, as shown below:
Illustration by Dan Holtquist. This column does not necessarily reflect the views of house lineof Reverse Mortgage Daily and its owners.
To contact the author of this article: Dan Hultquist at: [email protected]
To contact the editor responsible for this story: Chris Clow at: [email protected]
