The reverse mortgage rate month: August 2024

As discussed in previous reverse mortgage rate updates, the federally insured Home Equity Conversion Mortgage (HECM) is the dominant reverse mortgage in America. As a result, HECM has become synonymous with reverse mortgages.

But did you know that almost all HECMs created today are variable rate loans? This is in stark contrast to the traditional term mortgage sector, which is dominated by fixed rate products.

Consider that 99.81% of HECMs originating in June 2024 were adjustable-rate mortgages (ARMs). To put this into perspective, there are currently more monthly reports of Bigfoot sightings in America than fixed rate HECMs.

Why variable rate?

There are several regulatory reasons for the popularity and dominance of the HECM ARM over the past decade. Let’s list six key advantages of the adjustable-rate HECM ARM over its fixed-rate counterpart:

• Security: The HECM ARM allows the borrower to leave unused funds in a line of credit (LOC). This LOC will not be frozen, reduced or eliminated when market conditions change. As long as the loan is in good standing, the LOC is available even if the loan balance exceeds the value of the home.
• Flexibility: The HECM ARM is an open-ended loan. This means that the borrower can withdraw money when he needs it and in amounts that meet his needs. Simply borrow at any time, pay it off and borrow from it again indefinitely after the first year.
• Optional: The HECM ARM allows the borrower to change their payment plan from a growing line of credit to monthly installments at any time. Please note that requests for payment plan changes only cost $20.
• Accrued accounts: The HECM ARM can minimize interest accrual when the borrower withdraws only what is needed and in small amounts over an extended period of time.
• Organic growth: The HECM ARM has an increasing borrowing capacity. The available LOC will naturally grow in the borrower’s favor, at the same compound rate applied to the loan balance. This function is unique in the financial world. It is also the main reason why reverse mortgages are useful in financial planning.
• Prepayment growth: The HECM ARM borrower can take advantage of voluntary partial prepayments. These payments will increase the HECM LOC “dollar for dollar.” They will also increase the homeowner’s net worth and can result in an IRS Form 1098 tax deduction. Borrowers should consult a tax professional before making a voluntary prepayment.

In today’s market, where many expect a decline in interest rates, HECM ARMs may also see more favorable interest rates in the short term.

August 2024 update

The weekly average of the 10-year Constant Maturity Treasury (CMT) has fallen 38 basis points over the past 38 days. The corresponding reduction in expected interest rates for HECMs has made more money available for new HECM applications and closings in August. This would be a good time for homeowners to revisit and update loan proposals.

The weekly average 10-year CMT of 3.91% came into effect on August 13, marking the lowest rate of the year so far. It has created a sense of optimism for a third quarter that needs a boost in credit production. The 1-year CMT also followed this downward trend, as shown here:

Images by Dan Hultquist. This column does not necessarily reflect the views of HousingWire‘s Reverse Mortgage Daily and its owners.

To contact the author of this story: Dan Hultquist at [email protected]

To contact the editor responsible for this story: Chris Clow at [email protected]