In our May 2024 Reverse Mortgage Rates Report, we discussed how reverse mortgage borrowers may benefit from higher interest rates over the life of the loan. This is counterintuitive, but reverse mortgages need to be thought of in reverse.
The reason, of course, is that the unused principal on an adjustable rate Home Equity Conversion Mortgage (HECM) increases at the same rate that is applied to the loan balance. So, people who get their HECM out early and carefully draw down their HECM Line of Credit (LOC) over time will have greater borrowing power later. This power is strengthened by rising interest rates.
This is what I call “organic” growth because it happens naturally without the borrower having to do anything, and it’s one of the reasons why reverse mortgages can be helpful for retirement planning.
However, your HECM's Line of Credit (LOC) can increase if you voluntarily make a partial prepayment. The increased “prepayment” creates one of the lesser known benefits of the HECM product: the flexibility to pay back the funds when you don't need them and withdraw them at any time.
Does a voluntary prepayment increase the HECM LOC dollar for dollar?
Yes, voluntary prepayments on an adjustable rate HECM not only reduce the loan balance but also provide four potential benefits to the borrower: 1) increased equity, 2) reduced interest accrual, 3) increased available LOC, and 4) a potential tax deduction (however borrowers should consult with a tax professional).
However, there is widespread confusion regarding the application of reverse mortgage prepayments. When prepayments are made on a HECM loan, a certain portion of the loan balance is paid off first, starting with the portion representing the mortgage insurance.
But to be clear, any prepayment you make on an adjustable rate HECM will increase your line of credit dollar for dollar when the payment is recorded, as confirmed in the U.S. Department of Housing and Urban Development (HUD) handbook.
Please note that customers must maintain a minimum loan balance of $100 at all times or the servicer may close the reverse mortgage and therefore the LOC.
Updated July 2024
The weekly average of 10-year Treasury bills (CMT), used to calculate expected interest rates, decreased slightly from the previous month.
The current weekly average of 4.39% will be added to lender margins and will apply to new loan applications made from July 9 through July 15. According to the latest economic report, the 10-year CMT trend has changed multiple times in the past 30 days.
Graphic by Dan Hultquist. This column does not necessarily reflect the opinion of HousingWire's Reverse Mortgage Daily or its owners.
To contact the author of this story: Dan Hultquist [email protected]
To contact the editor on this article: Chris Clow [email protected]