When setting up a Home Equity Conversion mortgage with a lender, interest rates matter a great deal. This is because interest rates are the single biggest factor in determining what percentage of your home’s equity you will initially have access to. I say initially because most reverse mortgages are set up on a credit line. And the unused portion of that credit line grows over time according to the interest rate for that year plus an additional .5%. So, let’s assume a scenario of someone with an unused credit line available at $100,000. If interest rates are 3.5%, then that credit line will grow at an annual rate of 4% (3.5% plus .5%). After the first year, the credit line will be just over $104,000 (it’s slightly over $104,000 due to monthly compounding versus a once per year calculation). The following year, the credit line will be $108, 500. If interest rates rise, the credit line will grow even more.
But I digress from my main point. Current interest rates make a large difference in eligibility when applying for a HECM. Look at another example. Homeowner at age 70 with a $400,000 house. Here’s what eligibility looks like after setup costs the way I structure it at Geneva Financial:
- Current rate eligibility as of Feb 2020: $217,000-$220,000
- If interest rates rise 1%: $193,000-$195,000
- If interest rates rise 1.5%: $180,000-$183,000
- If interest rates rise 2.0%: $172,000-$175,000
As you can see, there is a $45,000 difference in starting equity eligibility compared to now versus a 2% rise in interest rates, given the same age and home value.
Take Advantage of Low-Interest Rates While We Have Them!
Even if you don’t need to draw funds now, setting up a reverse mortgage equity credit line when rates are low is optimal. Due to the Federal Housing Administration’s mortgage insurance included in the program, this amount of equity, represented by the credit line, is protected from market fluctuation. That’s because the credit line can never be involuntarily shut down or closed. And it can never be stopped from growing. Invest in access to your equity now while conditions are ideal and grow it for use it later in retirement when you may decide to give your monthly cash flow a boost.
To learn more about a home equity conversion mortgage, please contact Chris Handy, CRMP® at 888.589.1642 or email firstname.lastname@example.org to get your exact qualification figures.