The Bummer of Interest Rate Increase for Reverse Mortgage
If all else fails in the economy at least we can turn the TV on and see how interest rate continue to decline in the Fed's effort to stimulate the economy.
I'm getting calls from would-be reverse mortgage customers asking me how the dropping interest rates affect the amount of money a lender would lend to them.
I reply the rates have gone up, not down.
Their logic is not incorrect. In actuality interest rates have come down. In fact the Constant Maturity Treasure Index is now down to point forty-four percent. The thing is this not the only factor.
The part not talked about on the news is that investors in reverse mortgage backed securities are backing off purchasing these securities.
You gotta have people investing or the whole deal goes caput. So, profit margins increased by one percent in the last week.
The former margin was set at 1.75%. Currently at 2.75% and probably going up. That is a 36% increase.
The higher interest rate results in a couple different effects. The first being the reverse mortgage borrowers loses equity in the home that much quicker.
The second is people will qualify to receive less money.
The two affects are related in the fact that the higher rates eat into the house equity more rapidly.
A reverse mortgage lender must take the home's equity very seriously. It is the lender's security. Therefore the lender lends less when rates go up.
How mortgage companies go out of business, as we know from recent financial trouble, is when more is owed than the home is actually worth.
If the mortgage company is ever in this position it is totally out of luck. It must accept the sale price of the home as repayment for the loan.
Who this rate increase will effect most dramatically are those currently in escrow who have already been told how much money they will receive with the former low rates.
Many of these folks are banking on being able to refinance their forward mortgage thereby dumping that big monthly payment. This may no longer be possible.
We'll see how this plays out, but it's pretty tough right now.
I'm getting calls from would-be reverse mortgage customers asking me how the dropping interest rates affect the amount of money a lender would lend to them.
I reply the rates have gone up, not down.
Their logic is not incorrect. In actuality interest rates have come down. In fact the Constant Maturity Treasure Index is now down to point forty-four percent. The thing is this not the only factor.
The part not talked about on the news is that investors in reverse mortgage backed securities are backing off purchasing these securities.
You gotta have people investing or the whole deal goes caput. So, profit margins increased by one percent in the last week.
The former margin was set at 1.75%. Currently at 2.75% and probably going up. That is a 36% increase.
The higher interest rate results in a couple different effects. The first being the reverse mortgage borrowers loses equity in the home that much quicker.
The second is people will qualify to receive less money.
The two affects are related in the fact that the higher rates eat into the house equity more rapidly.
A reverse mortgage lender must take the home's equity very seriously. It is the lender's security. Therefore the lender lends less when rates go up.
How mortgage companies go out of business, as we know from recent financial trouble, is when more is owed than the home is actually worth.
If the mortgage company is ever in this position it is totally out of luck. It must accept the sale price of the home as repayment for the loan.
Who this rate increase will effect most dramatically are those currently in escrow who have already been told how much money they will receive with the former low rates.
Many of these folks are banking on being able to refinance their forward mortgage thereby dumping that big monthly payment. This may no longer be possible.
We'll see how this plays out, but it's pretty tough right now.
posted by Credit Counseling at
7:27 AM
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