This will be welcoming news if you are worried about reverse mortgages being non-FDIC insured. Fortunately for reverse mortgage borrowers, reverse mortgages are not FDIC insured and, therefore, are not endangered by all the turmoil with banks at this time.

The U.S. Department of Housing and Urban Development (HUD) guarantees the reverse mortgage. Specifically, HUD guarantees that the borrower can access the full line of credit.

ARLO explaining how reverse mortgages are not FDIC insured

Rates had been creeping up quickly in recent weeks, driving borrowers’ available funds on reverse mortgages down. Still, when Signature Bank collapsed this past week, interest rates dropped, giving borrowers a reprieve.

The question is, will the reprieve be temporary, or will the rates keep falling?  And as the banking industry continues to be impacted by bank failures, how much better will reverse mortgages be just because they are not banking products insured by the FDIC? Unfortunately, no one can say.

A recent drop in interest rates have increased reverse reverse mortgage benefits

There are many reasons why a reverse mortgage makes more sense to most senior homeowners than other options like Home Equity Lines of Credit. If you received a proposal in the recent past and were one of those borrowers who were not happy with the amount you received due to the higher rates, now is a great time to get another quote.

It only takes a few minutes to check back, and borrowers are often pleased when they see the improvement.  When you consider that the reverse mortgage Principal Limit is locked at application but can float down at closing if the rates continue to drop, it makes sense to keep checking, and the benefits of the reverse mortgage are clear.

Lower Rates = Higher Principal Limits

Home Value November 2022
(40.9% LTV)		March 2023
(45.2% LTV)		Cash Benefit
$200,000$81,800$90,400$8,600
$300,000$122,700$135,600$12,900
$400,000$163,600$180,800$17,200
$500,000$204,500

$226,000
$21,500
$600,000$245,400
$271,200$25,800
$700,000$286,300$316,400
$30,100
$800,000$327,200$361,600
$34,400
$900,000$368,100$406,800
$38,700
$1,000,000$409,000$452,000
$43,000
Example of new benefit based on homeowner age 70. Expected Rate + lender margin of 1.75%.

Reverse mortgages line of credit cannot be frozen

When a borrower obtains a traditional line of credit from his bank (a Home Equity Line of Credit or HELOC), the funds are not guaranteed to be available.  Like a reverse mortgage, the line of credit is an adjustable-rate loan. Unlike a reverse mortgage, the bank can close that line of credit any time it decides to exit the line of credit lending. It can also require borrowers to requalify for the loan even if the borrower has never missed a payment.

Many borrowers felt they had the line to fall back on in the past, only to find that the bank froze their line of credit, stopped lending, or required new appraisals.  After 2009, it was not uncommon for many banks to need borrowers to go through new underwriting and to re-qualify to keep their current lines open before they were allowed to use their remaining funds if they were allowed to use them at all.   This can’t happen with a reverse mortgage.

Also See: Reverse Mortgage vs. HELOC – What’s the Smarter Choice?

HELOCs balloon in 10 years, and payments can skyrocket

There are no re-payments on the reverse mortgage if you continue to live in the home as your primary residence, abide by the terms (pay the taxes, insurance, and any other property charges on time, and maintain the home in a reasonable manner).  The HELOC will typically have a draw period of interest only for the first 10 years of the loan.  During this time, your payments are low, and unless you pay more than the amount due, no money is going toward the principal reduction of the loan balance.

At the end of the ten years, the loan enters the repayment term of the loan wherein the borrower cannot take additional draws from the line, and the loan becomes a fully amortized payment so that the loan will be repaid in full in the remaining term.  Payments on loans with outstanding balances can rise 2 to 3 times the previous interest-only amount. Many borrowers are shocked when not only do they no longer have access to the line but are now hit with a payment much higher than they are accustomed to.

HELOC vs HUD HECM Comparison

Compare FeaturesHome Equity Line of Credit (Bank HELOC)Home Equity Conversion Mortgage (HECM)
Borrower Minimum Age1862
Line of Credit Term10 Years Lifetime
May Be FrozenYes*No*
Line of Credit Growth RateNoFor Life
$0 Monthly Payment OptionNoYes
Income Requirements YesLimited
Credit Score680+Any
Reserves2-6 Months PITIAny
Low/No Closing CostsNoNo
Fixed Interest RateNoNo
Common IndexPrime Rate Treasury
*HELOC loans generally permit lenders to freeze or reduce a credit line if the home's value declines significantly. You must be prepared to make this “balloon payment” by refinancing, obtaining a loan from another lender, or using other means. You could lose your home if you cannot make the balloon payment.
Source: https://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf
**All line of credit programs may be frozen if you fail to maintain taxes and insurance or leave your home as your primary residence. If you enter bankruptcy, courts will not allow you to incur new debt while in BK proceedings, and therefore your line of credit during this time could also be frozen.

Refinance your HELOC to a HECM for peace of mind.

This may be fine for younger borrowers in the prime of their earning careers and businesses as they can refinance the loan with another loan at that time.  However, for seniors on a fixed budget, this might be catastrophic if they cannot qualify for a new loan under conventional underwriting guidelines due to income or other constraints at that time.

As more banks look to FDIC insurance to bail them out, the full effect on borrowers has yet to be seen.  Now is a great time for borrowers to secure funds that do not rely on their bank and grow on the unused portion of their line. That is where a loan guaranteed by the full faith and credit of the US government comes in handy. If you have a HELOC, you might consider refinancing into a HECM for this protection.

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