Interest rates make headlines almost every week, and if you’re a homeowner considering a reverse mortgage, you may be wondering what all that news actually means for you.
That’s why we created Ask the Pros, a series where members of our team answer some of the most common questions about reverse mortgages and home equity. We take topics that can feel complex and break them down into clear, easy-to-understand insights you can put to use.
This time, we’re tackling interest rates.
Our pro for this edition is Dan Ribler, Vice President of Capital Markets and Strategy here at Longbridge. Dan and his team work at the intersection of mortgages and the financial markets, giving him a firsthand view of the forces that influence interest rates. He sat down with us to share what moves rates, where the Federal Reserve fits in, and what it could all mean if you’re considering a reverse mortgage.
Q: What drives mortgage interest rates?
A: Mortgage rates are influenced by a number of factors, but two of the biggest are U.S. Treasury yields and something called mortgage spreads.
The 10-year U.S. Treasury is commonly used as a benchmark for mortgage rates. Because Treasury bonds are backed by the U.S. government, they’re generally considered a lower-risk investment. Mortgages carry additional risk, so investors typically expect a higher return for investing in them. That difference is known as the mortgage spread.
Here’s why that matters: after mortgages close, many are grouped together and sold as investments. The interest homeowners pay helps generate a return for the investors who purchase them.
Think of it from an investor’s perspective. An investor can choose from many different types of investments. A U.S. Treasury bond, for example, is generally considered one of the safest options because it’s backed by the U.S. government. To choose an investment with more risk — mortgages included — investors typically expect to earn a higher return. That return is known as “yield” and is expressed as a percentage.
That’s why mortgage bonds are generally priced as “Treasury yield plus something.” That “something” is the additional yield investors expect for taking on more risk — what the industry calls the mortgage spread.
Put the two together, and you have two of the biggest pieces influencing mortgage interest rates: Treasury yields + mortgage spreads.
Q: Does the Federal Reserve set mortgage rates?
A: Not directly. The Federal Reserve (Fed) sets the overnight rate, which is a short-term interest rate that influences what banks charge to lend money to each other. But the Fed doesn’t directly set Treasury yields — those are determined by what investors are willing to pay for Treasury bonds on the open market.
And those investors are often looking ahead. They care less about what the Fed did today and more about what they expect the Fed to do in the months and years ahead. For someone investing in a 10-year Treasury, for example, that means considering what could happen over the next 10 years.
By the time the Fed actually cuts or raises rates, investors have often anticipated the change and already “priced it in.” That’s why you may sometimes see the Fed cut rates while mortgage rates move in the opposite direction.
“Priced in” simply means investors have already adjusted what they’re willing to pay based on what they expect to happen. So, when an expected event finally occurs, the market may not move much in response because it has already accounted for it.
Then there’s the mortgage spread we talked about earlier. That can move independently based on market conditions and how much additional return investors expect for investing in mortgages. So, you have two important factors influencing mortgage rates — Treasury yields and mortgage spreads — neither of which the Fed directly controls.
The short version: The Fed influences short-term interest rates, but it doesn’t directly set mortgage rates. Those are shaped by the broader financial markets and what investors expect to happen in the years ahead.
Q: Do interest rates affect how much you can get from a reverse mortgage?
A: Yes, they can. Interest rates are one factor that helps determine how much money you may be able to access. In general, the lower the interest rate, the more you may be able to access.
But the interest rate is only part of the picture. Your age and home value also play an important role in determining how much of your home equity may be available to you.
There are also different types of reverse mortgages available today, the most common being the FHA-insured Home Equity Conversion Mortgage (HECM). Other options are proprietary reverse mortgages, like Platinum by Longbridge, which may offer greater flexibility and access to more of your home equity in certain situations.
These products can have different rates, features, and ways to access your funds. And because every homeowner’s situation is different, the option that makes sense for one person may not be the best fit for another.
That’s why working with a reputable lender is a must. A licensed mortgage professional can run the numbers with you, explain the options available, and help you understand how factors like interest rates, age, and home value affect what you may be eligible to receive.
Q: Should you try to time the market before getting a reverse mortgage?
A: Personally, I don’t try to time the market when I get a mortgage. To me, a mortgage is a tool to finance my home, not a way to bet on where the market might go next. When I take out a mortgage, I focus on understanding the costs involved, including closing costs and the interest rate, and whether the loan makes sense for what I’m trying to accomplish.
Trying to “play the market” by timing interest rates can be tricky. Nobody knows with certainty which way the market will go from one day or week to the next. I believe casinos are for gambling. Mortgages are for financing a home. That’s why I’d rather focus on whether a loan works for me today than try to predict the perfect time to move forward.
It’s also worth knowing that if rates move significantly in your favor after closing, reverse mortgages can be refinanced, just like traditional mortgages.
Refinancing means replacing your current loan with a new one, often to get a better rate or different terms.
Reverse mortgages don’t have prepayment penalties, but refinancing does involve closing costs and other expenses, so it’s important to consider whether the potential benefits outweigh those costs.
The urge to time the market is understandable. But ultimately, trying to predict exactly where rates are headed is market speculation. As homeowners, we don’t need to be bond market experts. We just need to understand the loan we’re considering, what it will cost, and whether it makes sense for our situations.
Bear in mind that this is my personal opinion on the matter. We always recommend homeowners consult with a financial advisor to discuss how the market might impact their individual situation.
Q: Are reverse mortgage rates higher than traditional mortgage rates?
A: Generally, yes. Reverse mortgage rates are typically higher than traditional mortgage rates — often by about 1% to 3%. One reason is that a reverse mortgage offers homeowners flexibility that a traditional mortgage doesn’t.
Here’s what some of that flexibility looks like:
- Optional monthly mortgage payments. One of the biggest and most distinctive benefits of a reverse mortgage is that monthly mortgage payments are not required. As with any loan, you must, of course, meet your loan obligations, like keeping up with property taxes, homeowners insurance, and home maintenance.
- Different qualification requirements. Unlike traditional mortgages, where loan eligibility is based primarily on income and creditworthiness, reverse mortgage qualifications look at factors like your age, your property, and the amount of equity you have in your home.
- Non-recourse protection. Another key benefit of reverse mortgages, and one of several built-in consumer protections, is the non-recourse feature. Put simply, this means you (or your heirs) will never have to pay back more than the home is worth when it’s sold and the loan is repaid.
That added flexibility means the lender and investors take on more risk, which can mean a higher interest rate.
Rates can also be higher because of the mortgage spreads we talked about earlier. Reverse mortgage spreads tend to be wider than traditional mortgage spreads. In simple terms, investors generally expect a higher return for investing in reverse mortgages — and that contributes to the higher interest rates borrowers may see.
The short version: Reverse mortgage rates are generally higher, but you’re also getting a different kind of loan — one designed with features and flexibility that traditional mortgages don’t offer.
Thanks, Dan, for helping us decode interest rates and their impact on reverse mortgages!
Understanding what moves interest rates is helpful. But the more important question is what today’s rates could mean for you. Curious how today’s rates could affect your options? Connect with our team. A Longbridge reverse mortgage consultant can walk you through the numbers, answer your questions, and explain the options that may be available to you — with no pressure and no obligation.