6/30/2014 Update: Updated copy of Gerald Wagner’s article is attached, with changes due to 6/27/14 announcements by HUD of changes coming August 4, 2014. No major points. In general from current interest rates, increases result in sharper drops. For older borrowers the amount available to borrow goes up. See the comments below the post for further clarification.
A 1.0% rise from current 10-year interest rates will reduce the amount of money available from a new reverse mortgage by 21% for 63-year old homeowners!
How much money is available from a reverse mortgage? There are three factors: home’s value, youngest spouse’s age, and 10-year LIBOR swap rate. The reverse mortgage money available is very sensitive to the 10-year interest rate. For the same reason long-term bond prices go down sharply as interest rates go up, the value available for a future reverse mortgage also goes down sharply. The house is collateral for the loan. If interest rates are high the loan compounds faster and is more likely to exceed the home’s value. As a result, when rates are high the HECM program lends you less. If you think interest rates may go up the best time to get a reverse mortgage is before the increase – even a little increase from where it is now has large impact.
A new article by Gerald Wagner titled “Consider_a_HECM_Reverse_Mortgage_Now_v4” explains this well and offers great insight. This is a timely aspect of reverse mortgages.
Another of this blog’s posts, Strategic Uses of Reverse Mortgages for Affluent Clients, shows you that getting a reverse mortgage line of credit early gives it the best chance to grow.
There are three compelling reasons to apply for a HECM Reverse Mortgage before 10-year rates rise: (1) maximize the money available, (2) give a line of credit time to grow and (3) the FHA as the HECM rule writer can and does change the rules from time to time to further reduce available money. Once a loan agreement is in place that homeowner is protected.
Here’s Jerry’s executive summary:
- The most generous reverse mortgage program is the FHA’s home equity conversion mortgage (HECM). The money available, called the Principal Limit, depends on the age of the youngest borrower, the value of the home, and the 10-year LIBOR swap rate.
- On June 27, 2014, the Principal Limit factors were changed making them more sensitive to swap rate increases and giving added benefits to older borrowers.
- In 84% of the most recent 152 weeks, the swap rate has been low enough to give borrowers the maximum Principal Limit available under the HECM program.
- If the swap rate rises 1.0% above its current level (from 2.66% to 3.66%), the money available to a 63-year-old will fall by 21%.
- One can just let the new HECM lay fallow. Its line-of-credit capacity will grow each month, and when funds are finally accessed they are tax-free loan advances.
- The cost of obtaining a HECM has been greatly reduced. Borrowers who have financial resources will pay only a 0.50% initial Mortgage Insurance Premium (more info below).
- In October 2013, the FHA reduced Principal Limits by 15%. Entering a HECM will guard against future changes in Principal Limits.
Jerry distributed his paper with the following statement:
“You are welcome to distribute the paper, post it on your website, etc. so long as you agree to http://creativecommons.org/licenses/by-nd/4.0/. And leave the live link to the Ibis’ wealth calculators. And only distribute the latest version as updates become available.”
NEWSFLASH: June 27, 2014: HUD released new regulations changing the amount of money available from a HECM as of August 4, 2014. Two general patterns to the changes: (1) more money available for older borrowers and (2) for younger borrowers, there’s greater sensitivity to interest rates than before: as interest rates go up, less money available is available for them. A more detailed description is available here . The planning implication is an increased incentive to get going on detailed understanding of client situations so you can take advantage of the better of the current or coming tables depending on the homeowner. Most homeowners age 78 and higher will want the new August 4 table, assuming interest rates stay the same.
I am a reverse mortgage loan originator. I calculated the new Principal Limits for 6 different customers, ages 68 to 81. Every single one had a higher Principal Limit, holding the interest rate constant. It is true that the increase was greater for the older borrowers, but every age group except 62 and 63 year olds sees an increase – and the decrease for 62 year olds is 0.2%, whereas for 63 year olds it is 0.1%. The new Principal Limit Factors are available to loan applicants immediately, so anyone 64 and older benefits, while 62 and 63 year olds can utilize the old factors until August 4th.
Jim’s correct. With rates where they are today, with 10-year LIBOR swap at 2.635, its a close call (check rates @ wsj.com). If the 10-year rate stays flat, only a tiny percentage of loans will have less money available. If LIBOR go up around 60 basis points some borrowers under age 65 would have a bit of a decline in money available, or perhaps chose a different origination fee/margin tradeoff. As the 10-year rate climbs the youngest borrowers will notice the largest changes first, and as rates continue up older and older homeowners will see declines. None of this is big enough to get too excited about in the short term until interest rates go up noticeably, but definitely is something to be aware of. And for a while there’s new flexibility: if a borrower has gotten far enough in the process to have an FHA case number but not closed their loans by Aug 4, they can use either pre- or post-Aug 4 numbers, following requirements in HUD’s announcement. This choice will be especially important for older homeowners who are likely to see the largest benefit of the new rules.
An ntriguing discussion іѕ worth comment. I do believe that you need to publish mօrе about this subject, it may not bе а taboo matter but usually folks
ԁon’t discuss these issues. To the next! Best wishes!!