Most of the time, homeowners understandably view higher interest rates in a negative light.
However, higher interest rates are not always a bad thing, especially when it comes to a reverse mortgage line of credit.
What's in this article?
In this article, we’ll explore the potential positive and negative impacts of interest rates on reverse mortgages to help you navigate your options.
Do reverse mortgages have high interest rates?
The most common type of reverse mortgage is the home equity conversion mortgage (HECM) backed by the U.S. Department of Housing and Urban Development (HUD).
Several factors influence a borrower’s HECM rate, including:
- Age (older borrowers may be able to access lower rates)
- Property value and zip code
- Disbursement option (line of credit, lump sum or monthly payment)
- Fixed vs. adjustable rate
Based on these factors, your reverse mortgage interest rate may be competitive or marginally higher than other types of loans. It all depends on your personal lending scenario.
Generally, reverse mortgage interest rates can be higher than conventional loan rates, but comparable to home equity loans or home equity lines of credit (HELOCs).
They’re also typically lower than unsecured loans such as credit cards and personal loans.
Once you supply basic information about your loan scenario, your HECM lender can provide you with a personalized interest rate and explain the influencing factors.
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How do interest rates impact reverse mortgages?
As is the case with “forward” mortgages (such as conventional 15- or 30-year loans), your interest rate will determine how much interest you’ll pay over the life of the loan. However, that rate can also determine how much you can borrow.
HUD provides a specific table for HECMs to determine a borrower’s loan amount or principal limit. The principal limit is largely determined by a borrower’s age, current interest rates and the value of the home.
For example, in 2023, a 62-year-old’s principal limit factor is 31.2%, while an 80-year-old’s principal limit factor is 44.6%. The loan limit is $1,149,825 for all borrowers.
The principal limit factor (PLF) determines the percentage of a home’s appraised value or the FHA lending limit (whichever is lower) that a borrower is eligible to receive as a loan.
HUD determined the values above using an example interest rate of 7%.
Interest rates based on schedule and disbursement options
HECM borrowers can choose between fixed rates or adjustable rates with a range of disbursement options.
With a fixed rate, borrowers will receive a single lump sum disbursement of funds at closing. The interest rate will remain fixed for the life of the loan.
Adjustable-rate HECMs have more disbursement options, including a line of credit, single lump sum or monthly installment. Rates will adjust either monthly or annually and generally are slightly lower than fixed rates.
The benefit of a fixed-rate reverse mortgage is a predictable rate for the life of the loan, while adjustable rates offer borrowers flexibility with how they receive their funds.
Additionally, adjustable-rate HECMs offer a line of credit, which has a higher growth potential.
How does a HECM line of credit benefit from higher rates?
The unused portion of a HECM line of credit grows over time because the Federal Housing Administration (FHA) has applied a growth rate tied to mortgage interest rates.
When market interest rates are higher, the growth rate of the HECM line of credit is also higher. This means the available line of credit can increase more rapidly.
Higher interest rates result in a faster increase in the available funds on the line of credit, even if you don’t use those funds. It’s as if the line of credit itself is growing.
This can be advantageous because it means you have access to a larger pool of funds over time, providing more financial flexibility and potentially protecting your retirement finances.
How to get the best interest rate
Borrowers are able to influence their interest rates with typical forward mortgages by boosting their credit score, making a larger down payment and other methods.
Can reverse mortgage borrowers influence their rates, too?
Reverse mortgage borrowers do have some influence over their interest rates, but their options are a bit different.
For HECM borrowers, the following choices can impact your interest rate:
- Choosing a fixed vs. adjustable rate
- Comparing offers from lenders
- Locking in a favorable rate
- Monitoring economic trends
- Inquiring about additional programs with your lender
While borrowers don’t have the same level of control as they may have with a conventional mortgage, there are steps every borrower can take to ensure they snag the best rate and terms based on their unique scenario.
The first step is to apply with an experienced, reputable mortgage lender who can help match your personal financial situation and goals with the right loan options.
Apply for a reverse loan with Compass Mortgage
The experienced loan officers at Compass Mortgage can help you successfully navigate the reverse mortgage process.
We promise to be your partner and advocate throughout every step, ensuring you understand the terms and responsibilities associated with this loan.
To qualify for a HECM, borrowers must meet the following requirements:
- 62 or older
- Home is the primary residence
- HUD-approved property types, such as single-family homes, condos or townhomes
- Complete reverse mortgage counseling from a HUD-approved counselor
- Significant equity in your home
- Plus any lender-established credit, income or asset requirements
Remember that a reverse mortgage loan doesn’t become due until you move out, sell the home, pass away or neglect to maintain the home or pay taxes and insurance. You can also repay the loan at any time if you so choose.
If you believe you qualify for a HECM, apply now with Compass Mortgage or call us at (877) 677-0609 to speak to a loan officer.
We look forward to helping you determine your options and build a path forward!