When the Federal Reserve raised interest rates in 2015, it was the first time in nearly a decade. Since then, the rate has been raised twice more, most recently in March. If you expect this upward trajectory to be short-lived, you’re in for a rude awakening. The Fed expects interest rates to continue rising as the economy improves, bucking a roughly 30-year downward progression.
Most people know that these increases could affect the rates they get on their mortgages or refinance opportunities. But some are unclear about how this change affects reverse mortgages. For seniors looking to supplement their retirement with a reverse mortgage, here’s a look at what this trend means and what steps they can take to lessen the effects on them.
How reverse mortgages work
A reverse mortgage allows those ages 62 or older to tap into the equity they have built up in a home. Many seniors have paid off all or most of their mortgage, so the equity available is typically significant. Many of these homeowners also might have limited retirement savings.
With a reverse mortgage, homeowners get a guaranteed monthly payment from their lender in exchange for signing over ownership of the house to the lender. The homeowners are allowed to live in the home until they die or move.
Reverse mortgages allow seniors to access the equity in their home without selling their homes. Most retirees don’t want to move, and their home is one of the biggest assets they have. By taking on a reverse mortgage, they can remain in their house while receiving a lump sum or regular monthly payments.
How the monthly payment is determined
The amount that older homeowners receive in a reverse mortgage depends on several factors, including their age, how much equity they have, the value of the house, and current interest rates. For example, a couple who are both in their 70s with 50% equity in a $500,000 home will get a different monthly payment than a 63-year-old man with 100% equity in a $125,000 home.
Other factors that can affect their monthly payments are if there are any liens on the home; whether there are any house repairs needed; and if the owner wants a lump-sum of cash as well or instead of monthly payments. According to Jason Eichmiller of Reverse Mortgage Reality, interest rates and the economy have a tremendous effect on reverse mortgages.
With reverse mortgages, rising interest rates don’t cause a payment to increase…they do cause new reverse mortgage applicants to qualify for less money.”
How the rates affect reverse mortgage payouts
When rates are low, seniors can qualify for more money than when rates are higher. That’s because it’s easier for a lender to sell a home when rates are low, and the bank always needs to factor in how easy it is to unload a house.
Eichmiller says, “In general, when the economy improves, interest rates go up.” He adds, “With reverse mortgages, rising interest rates don’t cause a payment to increase [because there is no monthly mortgage payment], they do cause new reverse mortgage applicants to qualify for less money.” That means that if interest rates go up next week, you’ll qualify for less money then than if you get a reverse mortgage today.
In general, interest rates have been increasing since the market stabilized after the Great Recession. If you’re a senior interested in a reverse mortgage, it might be better to pursue that when interest rates are low instead of waiting for rates to go up even more. However, if you’re not sure that a reverse mortgage is the best fit or if you want to move somewhere else, you should hold off no matter where interest rates go.
“If Sally Senior has a magic crystal ball and knows that interest rates are going to continue to increase, she would be wise to lock in her reverse mortgage as soon as possible,” Eichmiller said. “Once Sally’s reverse mortgage is set up, our wise senior won’t lose any money when the market and interest rates continue to increase.”
That’s because, once a reverse mortgage is set by the lender, the terms don’t change. It’s like a regular mortgage. If you lock in a fixed rate of 5%, your rate won’t change just because the market starts to change.
Once Sally’s reverse mortgage is set up, our wise senior won’t lose any money when the market and interest rates continue to increase.”
Other factors to consider
The biggest factor in how much you can earn from a reverse mortgage is the value of your home and the balance of your mortgage. If you live in a neighborhood that is seeing a surge in property values, you might qualify for a bigger reverse mortgage than you initially thought. Conversely, seniors who own a home in a declining area might have a harder time, even if they have 100% equity.
Homeowners do have some control over how much they receive. For example, a home that needs a new roof might not be eligible for a reverse mortgage, whereas a home with a recently re-shingled roof could qualify for a hefty return. That’s because homes need to be ready for sale when the homeowners pass away or move out.
Also, the bank wants to see proof the residents are able to pay for basic upkeep, maintenance, property taxes, and insurance. If your finances don’t show that you can afford to keep the house in good condition, you probably won’t qualify for a reverse mortgage.
As the market continues to improve, interest rates are likely to go up. That means seniors who want a reverse mortgage will see smaller payouts.
If you’re seriously considering a reverse mortgage, make sure you compare fees and terms before committing to a loan.
Check out SuperMoney’s list of reverse mortgage lenders here.