Are Reverse Mortgage Rates on the Rise?

In the face of a recession and a housing crisis, reliable financial programs sometimes need re-evaluation. But even with rising margins, the benefits of reverse mortgages remain strong and intact. While margins are going up, index rates are going down. What this means is that reverse mortgage programs continue to provide comfort and security for the older population, one of our country’s most financially vulnerable demographics.

The reverse mortgage has been around for decades, helping senior homeowners who are struggling to manage their rising medical bills and other expenses during their retirement, all on top of mortgage payments. The program allows these homeowners to convert equity in their homes to a tax-free income, without increased mortgage payments, and without the risk or reality of having to sell their home or sign over the title. But what happens to even the most stable and reliable of programs in the midst of an economic recession?

Normally, borrowers have a few options when it come to choosing their HECM program, but in an unstable economy with rising margins, consumers may feel they want to limit their choices to what is safe and affordable. With tightening credit, banks must raise loan margins in order to sell reverse mortgage loans on the secondary market. It would seem that when the margins increase on reverse mortgages the homeowner appears to end up with less money for their reverse mortgage—this would be true, except in this case interest rate index has gone down.

In the HECM program, the “margin” is the amount added to an interest rate index to determine the initial, current, and expected interest rates of the loan over its lifetime. Not long ago, a Constant Maturity Treasury (CMT) and margin was as low as 1.00. Lenders whose rates were stable at 1.5 were disappointed to see their margins go to 1.75. But now, Fannie May has added a 3.50 and 3.75 Treasury based monthly margin, 3.00 and 3.25 on the LIBOR monthly and on annual percentages up to 4.50. This is not as bad as it sounds because the index fluctuates as well. The basic formula to remember when it comes to reverse mortgages is index + margin = income. The index is the “base” to which contractually established amount, the margin, is added. If, for example, the index is 2.5% and the margin is 1.5%, the rate would end up at 4%.

In general, the higher the index and margin, the less money the borrower will receive. When the margin changes during the lifetime of a HECM loan, the borrower can end up losing a percentage of the income that they were expecting—but only to the degree that the actual fees change. When the interest rate index goes down, a rising margin will hardly impact the loan fees.

Even though their fees exceed those of private reverse mortgage loans, public HECMs cost less overall, with their low interest rates. In the long term, low interests rates equal higher savings over the life of an HECM reverse mortgage. State and local governments offer the lowest cost for reverse mortgages, though individual eligibility is stricter and the loans are limited to specific uses. It is frustrating for senior homeowners and their lenders that the margins on the HECM program keep going up and they begin to wonder why the rates must continue to increase, especially at a time when interest rates are low. But, the great thing about margins is that though they may go up, they can also fall right back down. Of course, this means that the currently low interest rates may rise, but that too is temporary. The roller coaster economy may be unpredictable, but what goes up must come down; rest assured, the rapidly rising margins will fall just as quickly as they rose.

The rates available when a borrower signs their contract may not be static over the entire course of the reverse mortgage, but a rising margin today is insignificant compared to the long-term benefits down the road. It will always be true that with a reverse mortgage the consumer is only liable to pay loans exceeding the cost of their home if the loan accumulates to equal the value of the home and they choose not to sell. If the home is sold, they will not be responsible for the loans exceeding the value of the home. The fundamentals of reverse mortgages will never change; heirs will never be liable for costs beyond the value of the home, and reverse mortgages will benefit seniors during their entire lifetime.

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