For all of the suffering that the COVID-19 pandemic is causing, it has also given rise to incredible rates. In fact, emergency interest 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 to the rate cuts, 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. Senior citizens that have considered a reverse mortgage in the past might recognize this to be a time to explore their options again. A substantially lower interest rate can give them access to more equity, even if their 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 them 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 an 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.
Scott Gordon is president and CEO of Austin, Texas-based multichannel lender Open Mortgage. Scott is a veteran of the mortgage industry with more than 16 years, referring to himself as a “serial entrepreneur” due to his passion for start-up culture and business investing. Scott is also the author of
Social Media for Loan Officers and
The New Reverse Mortgage. Originally a software engineer, Scott is highly invested in technology and using it to continue to improve his team at Open Mortgage.