Reverse Mortgage To Purchase A Home Or Eliminate A Mortgage Payment On Your Current Home – Now Or Never?

Issue 26.13

All right, here we go!  As interest rates begin to increase the market will begin and has begun to change dramatically.  Over the past 30 to 40 days, at the time of this writing, the interest rates on a 30 year fixed mortgage have increased ½%.  The average 30 year fixed rate going from 3.625% to 4.125% nationally. The largest and fastest increase we have seen in rates over the past four years. 

The stock market is hitting all time record highs, while unemployment numbers decrease and housing prices across the country are on the rise.  In some areas, housing is increasing in prices in the double digit figures and St. George Utah and its surrounding area is one of those double digit growth areas.  Likewise, consumer confidence across the country is at the highest it’s been in five years.

So, with all of this good economic news it also breeds and influences the bond market negatively.  Thus, the positive market is forcing rates to increase in a hurry from a mortgage back bond standpoint.  You will see your bond portfolios and their yields also decreasing as interest rates increase. 

How do rising rates have an impact on our reverse mortgage either for re-finance and or purchase?  Well, please understand this one simple mechanic; the higher the interest rate, the more equity that FHA requires you to put down on your purchase of a home.  So, for example, if you were going to buy a home for 300,000 dollars and in todays rates your down payment would need to be 120,000 to purchase the home under a reverse purchase and have and own the home for life with no mortgage payments for you and your wife.  If interest rates increase another ¼% than we will be over a floor and thus FHA will need to require more like 132,000 to purchase that same home.

So, even though we do not have any mortgage payments for life, the interest rate environment will dictate the level of equity that we must begin the loan with.  This just means much more equity down on each home purchase the higher that interest rates rise.  Thus, if you’re going to purchase a home you need to look at the reverse loan today versus later.  It will cost you additional thousands in the short future versus the percentages today at our current interest rates.

In continuing that same thought concerning a re-finance on the home you’re in – it works the same.  If you are in a home that appraises for 300,000 and you owe 180,000 today, then you can roll your existing conventional loan over to a FHA reverse loan and eliminate that mortgage payment for life.  In a few months, as interest rates increase then FHA’s loan limits will decrease to 160,000 for example.  So, because interest rates have increased, they will loan less than the current loan limit at today’s rates.  So, there will not be enough equity according to the new percentages to eliminate your mortgage without coming to close with the extra 20,000 to get below the net lending limit in this example.

So, without being too complex in this short discussion the higher the interest rate environment the more you will have to have in equity on your home and or when purchasing a new home.  So, if you are going to look at a reverse mortgage the timing may be better than we will see it in the coming years.

If you have any questions on a reverse mortgage please contact HUD or a FHA lender today.

Brandon Hansen is a Senior Mortgage Banker, Registered Investment Adviser Representative for Cherry Creek Mortgage / National Advisor’s Network.  He can be contacted at 435 668 2840 / 435 525 2266.