A bank Home Equity Line of Credit (HELOC) is a line of credit secured by your home that a bank controls and can freeze or eliminate at any time (subject to the terms of the security instruments).  This means that if the Bank decides to change the terms by lowering the line available or closing it entirely, the banks can do so at any time, with the only provision being they must honor the terms of the Note and Deed on any outstanding funds.

There is usually a draw period during which the payment may be for interest only, followed by the repayment period during which the payment can increase as much as 200 – 300%, and the loan balance must be repaid.  Payments must be made even during the draw period when the costs may be interest only.  Then later, when most senior borrowers’ incomes are lower, the payments can be considerably higher.  A Home Equity Conversion Mortgage is also known as a reverse mortgage.  Borrowers are not required to pay a monthly mortgage payment on a reverse mortgage but can choose to do so at any time, in any amount, without penalty.

Borrowers are guaranteed access to their full loan amount for as long as they still have funds available, and the lender cannot simply change their mind and decide not to offer the program any longer.  The loan is not due and payable until the borrower no longer lives in the home or does not pay their taxes and insurance in a timely manner, so it is important that borrowers pay their taxes and insurance in a timely manner but then as long as they do and live in the home, they can continue to live in the home and access all their funds without having to pay a mortgage payment.

When you have remaining funds left in your line of credit on a reverse mortgage, that line of credit increases by a percentage equal to the interest rate of the loan plus the mortgage insurance premium (MIP) renewal rate (currently .5%).  So if your loan interest rate is 3% and your MIP is .5%, your line of credit grows on the unused funds at a rate of 3.5%.

This is not interest you are earning as these funds are not in a bank account in your name. But since you are not accruing interest on them either because you have not borrowed them but you could have, the money you would have accrued in interest had you borrowed the money is added to the line of credit and made available to you to borrow later if you want or need it.  For a borrower with a $200,000 line of credit that is not being used, this can really add up in just a few years.  At the end of one year, instead of having $200,000 available, the borrower would have a line of credit of approximately $207,000 available.

If the rates do not change, the next year that line of credit would increase to more than $214,200 and it will continue to grow.  Again, it is not interest being paid to you and if you do take any money from the line, you would begin to accrue interest you owe on the money you draw but if you were able to wait for several years before you had to start drawing funds you would be able to experience a very nice increase in the funds available to you.

Interest rates obviously determine the amount of money you or your estate will owe.  The higher the rates, the more money you would owe if you choose not to make any payments and live in the home payment free which is the whole idea of having a reverse mortgage for most people.  However, a reverse mortgage is affected by interest rates in other ways as well.

The amount of the funds you receive with a reverse mortgage is determined by the youngest borrower’s age, the property value or the HUD lending limit (whichever is less), and the interest rate on the Expected Rate.  The expected rate is a longer-term rate than the rate you will even use to get your loan and will no doubt be higher than the rate at which you even close your loan or at which you accrue interest but HUD uses the 10-year index to determine the amount of money you will receive under the program.

HUD established a “Floor Rate” of 3% and any Expected Rate at or below this rate at which borrowers are able to close their loan receives the maximum available under the reverse mortgage for the borrower’s circumstances (age, property value, etc.).  However, when rates begin to rise above 3%, the amount of money the borrower receives under the program begins to fall.  So, every incremental increase over 3% will lower the proceeds the borrower(s) will receive in their loan.

The absolute best time to take a reverse mortgage is when the property value is the highest and the interest rates are at or below 3% and the loan terms are the best that HUD will allow.  When will all that be?  That can be anyone’s guess but the last time people waited for the rates and HUD lending limits to improve, HUD changed their parameters by dropping the floor from 5% to 3% and also lowered the Principal Limit Factors (the amount of money allowed to each borrower as a percentage of their homes by age).

The moral of the story is that any time can be a good time.  If the rates are heading up and you do not get the most money available, you can always look at a refinance at some point in the future if the parameters then are better for your circumstances but if you continue to wait and they never come back to where you felt they should be, you missed your opportunity.  If you feel that you are “too young” now and you can do better by waiting a few years (older borrowers, get more money in their loans than do younger borrowers), do the math with the credit line growth and see how much the line would grow during the time you think the additional age would help.

Most of the time, the credit line growth if the line is left untouched adds more money to the availability of the line than the added funds due to the additional year(s) of age.  And once you have your loan, as long as you live in the property and continue to pay your taxes and insurance, your loan is secure whereas if your income drops or if you have difficulties with payment of taxes, insurance, or mortgage payments due to future income interruptions, you are not in danger of qualification at that time.

It is difficult to say exactly how inflation may affect future reverse mortgages.  It may require an adjustment to qualification methods.  What HUD deems appropriate income to qualify now may be deemed too little during inflationary times.  Obviously, higher interest rates will give borrowers much less on their Principal Limits (loan amounts).

Every incremental increase over 3% (the HUD floor rate) means there is less money available to the borrowers under the program.  We wrote an article about how higher rates can affect borrowers. The Article shows that with an increase in rates of 1.5% (which is not a huge increase), a 62-year-old borrower would receive a decrease of 8.5% of their expected loan proceeds.

On a reverse mortgage of $300,000, that is $25,500 less available to the borrowers!  There has been talking of interest rate hikes of 2% or more which on a $600,000 home could be over $67,000 less available to the homeowner on a reverse mortgage.  This is why waiting for the “right time” can be a bad idea, especially when rates are headed upward.