How Interest Rates Impact Your Reverse Mortgage Options
Amid the COVID-19 Pandemic, emergency rate cuts by the Federal Reserve have brought the federal funds rate to nearly zero. While not directly influenced by those cuts, mortgage rates for home buyers have followed a similar, downward trend and hover near historic lows.
As applications for new mortgages and refinancing grow in response, homeowners with substantial equity and those who aren’t interested in leaving their homes may see the low rates as irrelevant. However, interest rates also play a pivotal role in a Home Equity Conversion Mortgage (HECM) or reverse mortgage.
Access More Equity
A reverse mortgage, available to homeowners over the age of 62, is a loan based on the equity in a home. Payments are deferred for as long as the borrower remains in the house and maintains the property, including insurance and taxes.
Since payments are not required, the interest rate determines how much the balance grows over time, and therefore, how much of the equity can be accessed. Lowering the interest rate can increase the funds available to a borrower. If you had considered a reverse mortgage in the past, it might be time to explore your options again. A substantially lower interest rate can give you access to more equity, even if your home’s value has not increased.
A Slowing Economy
Federal Reserve cuts could be a signal that the economy may be slowing. Lowering the rates that financial institutions can borrow money is designed to increase the amount of money being spent and provide a boost.
For retirees, an ill-timed slow-down or recession can be a damaging blow to investments, and ultimately retirement plans. However, one reason HECMs are growing in popularity is due to their flexibility. Tapping into home equity can be an additional source of funds that buy you the time to avoid realizing investment losses, providing an opportunity for them to recover instead.
Fixed-Rate vs. Adjustable
Reverse Mortgage borrowers have the option of choosing a fixed-rate or adjustable-rate loan when pursuing a HECM. Taking advantage of current low rates and locking into a fixed-rate HECM will require a lump-sum disbursement of the full balance. Those interested in spacing out their loan in payments over time, or accessing the funds only if needed, will require an adjustable-rate mortgage. While the interest rate on money that is borrowed can increase, the available credit line will also grow over time.
Make sure you understand all of your reverse mortgage options by speaking with a knowledgeable originator at Open Mortgage. Visit OpenMortgage.com to find out more.