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At Longbridge Financial, LLC, we stay on top of all the latest news
and
industry
updates so you don’t have to.
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Why Are Today’s Low Interest Rates So Important For Reverse Mortgage Clients?
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While common sense tells us that a low interest rate on a loan is better than a high rate, with reverse mortgages there are additional reasons to pay particular attention to rising interest rates. Since the amount a client can access for the life of the loan is determined by rates at the beginning, current interest rates play a really important role.
The amount available to a homeowner is determined by FHA “Principal Limit” factor table. This table, created by the FHA, determines what percentage of a home’s value can be used by the homeowner to set up a credit line or monthly income stream, provide funds at closing and cover any loan costs. Here’s what that table looks like:
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Note that age is shown in the first column, and the numbers across the top represent interest rates (R0, R1, etc.) and the associated factor (PLF0, PLF1, etc.) This table shows, for example, that a 62 year old at a 5% interest rate can access 52.4% of their equity(red circle). If rates rise to 5.25%, that same client would only be able to access 49.1% of their equity – in fact, you would have to be 67 to get access to the same 52.4% of equity (purple circle). This is the biggest reason we often discourage waiting to start the loan in a rising interest rate environment – a small change in rates can cause a big drop in what is available.
Further complicating calculations, if rates rise by more than 1% - THE ENTIRE TABLE CHANGES. Compare the 5% table above to the 6% table below. See the difference? The 62 year old above that could access 52.4% at 5% can only access 39.5% at a 6% interest rate. Why? Because higher rates change the FHA’s risk. Since the FHA insures these loans, they care when interest accumulates faster due to a higher rate. A faster build-up of interest increases the risk to FHA. They manage that risk by cutting the percentage available to consumers when rates are above 5%. That 62 year old client that got 52.4% at 5% interest would have to be 79 to get the same percentage of equity when the 6% table is used. The factors are cut again at 7%, 8%, etc.
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What if rates are below 5%? It doesn’t matter – the 5% table is as low as it goes. Anything below 5% still uses the 5% table.
So what’s the bottom line? If a client is trying to pay off an existing mortgage or set up a growing credit line, you want them to be able to access as much of their equity as possible, even if they don’t need it or use it immediately. By encouraging them to get started in a today’s low rate environment, you can help your clients lock in as much flexibility as possible for the long term.
Rates have risen some, but NOW IS STILL A GREAT TIME TO GET STARTED - we are still on that 5% table. Take steps now to ensure that your clients get the message so they can lock in the best possible benefit from a reverse mortgage.
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BREAKING NEWS....
Federal Reserve Chairwoman Janet Yellon recently said, "a March interest-rate hike is likely appropriate".
To read the article in full,
click here.
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IN OTHER HECM NEWS...
A recent Wall Street Journal article, "New Thinking About Reverse Mortgages", further demonstrates the distinct advantages that a reverse mortgage offers as a direct result with a lower rate.
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“Now is an exceptionally good time to be considering adding a [reverse-mortgage] credit line to the retirement blueprint. Interest rates are low, which increases the credit limit on reverse mortgages and if rates rise over the life of the loan, that will add to the growth of the credit line"
Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services.
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COMPLIANCE CORNER
At Longbridge, advisors like you are important to us, so we make sure compliance is always top-of-mind. Did you know that when presenting the reverse mortgage program to your client, any specific product-related recommendations require a mortgage license? This means one of our reverse mortgage specialists should be a part of the conversation. Telling a client which type of payment option they should choose or whether they should select a fixed or adjustable rate product are just two examples of conversations that need a specialist. Sound complicated? It’s doesn’t have to be – Longbridge will makes it easy, and we are just a phone call away. We will work with your clients on all the loan details so you don’t need to become a reverse mortgage expert. You introduce the concept and we’ll take care of the rest.
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Need information for a client? Just want to ask a general question about the program or want to learn how to take the next step? Just send us an email by clicking on the button below.
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