They say there’s no time like the present. And if you’ve been considering a reverse mortgage, this is proving to be especially true. As retirement portfolios have taken a hit due to market losses in the wake of the global COVID-19 pandemic, more and more senior homeowners are looking to tap into their home equity—the largest contributor to household wealth.
If you’re considering a reverse mortgage, it’s only natural to want to get all the information you need to decide whether the program is right for you—and perhaps the best place to start is understanding how reverse mortgage rates work.
Like traditional “forward” mortgages, your interest rate determines the amount of interest you’ll pay on your loan. But in the case of reverse mortgages, the current interest rate holds an even higher stake. All HECM reverse mortgage calculations are based on a specific table provided by the Department of Housing and Urban Development to determine loan amounts for borrowers. This amount is called the “principal limit.” The principal limit depends mainly on three factors: the borrower’s age, the home value, and current interest rates.
Now here’s the good news. Recently, the rate used to calculate the principal limit on all HECM loan amounts, called the 10-year London Interbank Offered Rate (LIBOR) SWAP rate, was lowered significantly for the first time since the start of the COVID-19 pandemic—now it’s historically among the lowest we’ve ever seen. So what does this mean for you? In short, a lower interest rate means more available cash. Additionally, for borrowers with higher existing mortgage balances combined with other debt, the new rate presents an opportunity for a reverse mortgage to work where it may not have in the recent past.
Here are some additional factors that make now a favorable time for borrowers to receive the best reverse mortgage terms and offer potential relief for those facing unexpected financial challenges during this crisis.
Home Values Are Still High
It’s no secret that the higher value your home is, the greater your loan proceeds will be. Home values and proceeds have a direct correlation—if your home value decreases, the amount of cash you can receive from a loan, in turn, falls as well. And while the COVID-19 pandemic initially left us all bracing for a housing market collapse, this simply wasn’t the case. According to Realtor.com data for the week ending May 9, the median listing price in the United States actually increased 1.4% year-over-year1. And while existing home sales fell by almost 18% in April, home prices again increased 7.4% as compared to last year2. Despite the current economic state, your home value may be higher than you think.
Reverse Mortgages Are Largely Unaffected by the Stock Market
Known as a “buffer asset,” a reverse mortgage does exactly that—it provides a buffer outside a financial portfolio that homeowners can draw from after a market downturn. While market volatility stemming from the pandemic may have endangered income from retirement savings accounts, a reverse mortgage provides guaranteed monthly income that isn’t dependent on stock market swings. Using funds from a reverse mortgage allows time for portfolios to recover. And here’s the best part, unlike traditional forward mortgages, reverse mortgages do not carry the threat of an unexpected mortgage payment increase due to market inflation.
Flexibility in Repaying the Loan
One of the most attractive benefits of a reverse mortgage is that unlike traditional forward mortgages, there are no monthly mortgage payments required*. As a borrower, you have the flexibility to make payments on your own schedule—or make no payments at all. Reverse mortgages only come due when all of the borrowers on the loan no longer occupy the home. And there are flexible options for repayment, which you can read about here.
Reverse Mortgages Offer Stability Other Programs Can’t
As more and more Americans look to tap into their home equity amidst pandemic-related job losses and shutdowns, it’s become harder to do so. You may have read the headlines—several major banks and forward mortgage lenders have been forced to suspend HELOC applications and originations. While it’s becoming virtually impossible to secure a HELOC, we’re seeing more conversations and interest among borrowers to learn more about reverse mortgage options.
Unlike HELOCs, HECM reverse mortgages can never be frozen or canceled**. And this is just one of the several advantages a reverse mortgage offers over a HELOC, especially in an uncertain economy. To see all the ways a reverse mortgage stacks up against a HELOC, check out our complete comparison chart here.
And if your home value is $450,000 or more, Longbridge Platinum could help you secure even more available cash—up to $3 million. Our proprietary, non-FHA reverse mortgage, Platinum is comparable to a HELOC in terms of a low rate and low upfront costs, but designed specifically for seniors—to help them manage their cash flow with greater flexibility.
Today’s record-low interest rates, coupled with these other factors, make now one of the best times in a long time to consider a reverse mortgage.
With access to higher proceeds not previously available, you’ll be able to improve your income and monthly cash flow to live your golden years to the fullest.
At Longbridge Financial, we remain committed to responsibly helping homeowners reshape their financial future by educating them on reverse mortgages and helping them unlock the power of their homes.
* Real estate taxes, homeowners insurance, and property maintenance required.
** When borrowers are in compliance with the terms of the loan.