Four Predictions for Reverse Mortgage in 2016

Interest rates and housing prices could be good news for reverse mortgage borrowers

Interest rates and housing prices could be good news for reverse mortgage borrowers

If you’re considering getting a reverse mortgage, you’ve probably done your homework on loan basics and how a reverse mortgage differs from a traditional “forward” mortgage. (If you still have homework to catch up on, check out our introduction to reverse mortgage here.)

What you might not have considered is that the reverse mortgage market, like any market, is a dynamic one in which there are many moving and changeable parts.

This means that the factors to consider when deciding about a reverse mortgage in 2016 might be different from getting one last year. For example, many experts have made predictions about the housing market as a result of interest rates trending upward this year.

Here are four things that experts predict will impact reverse mortgages in 2016.

Interest rates forecast to rise

Interest rates have ticked up slightly as a result of the Federal Reserve Board’s Open Market Committee deciding to allow the Federal Funds Rate to rise on the heels of economic recovery. While no one knows if rates will increase further, many experts predict that rates will continue to build upon this initial hike.

According to Freddie Mac, the rate increase throughout the year is likely to average 4.4%.

“The 30-year mortgage interest rate started the year at about 3.7 percent and remained under 4 percent for most of the year,” Freddie Mac writes looking back on 2015.  Looking forward to its outlook for 2016:  “Mortgage rates will increase gradually through 2016 in response to monetary tightening, averaging 4.4 percent for the year.”

Reverse mortgage impact: Generally speaking, the impact to reverse mortgages is likely to mean less borrowing power.  How much less will depend on how high interest rates go.

It is important to understand that the impact of higher rates varies depending on the type of reverse mortgage you get.

Adjustable-rate reverse mortgages: The amount that can be borrowed under an adjustable-rate reverse mortgage depends upon the 1-month LIBOR, an index that interest rates are based on. Generally, the higher the rate goes, the less a borrower will be able to access under this type of reverse mortgage. Right now it is moving back up to rates last seen in 2008.

Fixed-rate reverse mortgages: Again, the result of a higher interest rate will likely mean less borrowing power for those who opt to take out a fixed rate reverse mortgage. However, it’s important to note that rates are still very low versus historic rates, so the impact in the near term is not expected to be very strong.

Locking in a lower rate now, should you be considering a fixed-rate reverse mortgage, may allow you to capture more borrowing power today.

Home values will rise slowly, steadily

There’s no telling exactly how home values will fluctuate, but some experts are predicting a slow and steady rise for prices in 2016.

“U.S. prices appear more sustainable than a decade ago,” says Fitch Ratings, which issued housing predictions in January. “Since then, the country’s population has increased by over 20 million people and total gross income is up by roughly 25% in nominal terms.”

Fitch sees home prices rising 4.5% in 2016, on a national basis.

Freddie Mac, in its housing predictions for 2016, forecast a similar uptick at 4.4% in 2016.

“The imbalance between housing demand and supply continues to boost prices. We expect house price growth to moderate a bit to 4.4 percent in 2016, still well above the long-run sustainable rate of house price growth,” Freddie Mac’s economists wrote in December. “The 2016 moderation in house price appreciation reflects, in part, the reduction in affordability and associated reduction in demand that will follow the Fed’s monetary tightening.”

Reverse mortgage impact: What does it mean for reverse mortgages? More borrowing power. Because borrower amounts are also based on the appraised home value of the borrower, a higher-valued home means a borrower can qualify for a larger loan amount.

Of course, the home price recovery is varied market to market, and some have already recovered to levels well beyond their previous peaks.

It’s best to use a reverse mortgage calculator that can tell you how much you’ll be able to borrow based on today’s appraised value of your home.

Product changes may take place

The majority of reverse mortgages are insured by the Federal Housing Administration under the government’s Home Equity Conversion Mortgage program. The program is administered by the Department of Housing and Urban Development, which is the rulemaking body for “HECM” loans.

This means that HUD can make program changes at any time, based on market conditions, borrower population changes and other factors. No one really knows when a rule change will take place in the reverse mortgage market or in any of the programs that HUD oversees.

Reverse mortgage impact: Here are the types of changes HUD has made recently that have had a direct impact on reverse mortgages.

Introduction of more non-borrowing spouse rights: In 2015, HUD issued a new rule that protects non-borrowing spouses who are married to reverse mortgage borrowers.  Typically a non-borrowing spouse is younger than 62. Today, non-borrowing spouses are allowed to remain in the home of the reverse mortgage borrower even after that borrower has passed away. The non-borrowing spouse must still adhere to the loan terms, including the payment of property tax, homeowners insurance and property maintenance.

Change in principal limit factors: In 2014, HUD changed the table that determines “principal limit factors,” or the amount that people can qualify to borrow. The table is set by HUD and considers the age of the borrower, interest rate and home value to determine an amount that can be borrowed.

At the time of the change, older borrowers were able to receive more proceeds than before. However, the table also became much more sensitive to interest rate changes.

In 2013, the agency also made major changes to the principal limit factor tables, resulting in a roughly 15% across-the-board cut in the amount that people could qualify to borrow.

Introduction of financial assessment. In 2015, HUD introduced a new financial assessment that all borrowers must undergo. The agency had long discussed such an assessment as a means to better determine whether a borrower could meet his or her loan obligations.

The financial assessment is not unlike what borrowers must go through to get a forward mortgage. It factors in income, assets, debts and other financial criteria to determine that a borrower will have enough money, either through a set-aside or other means, to meet the loan’s requirements.

Major changes are not expected in 2016, but HUD rules are always a wild card when it comes to reverse mortgages.

Financial planners will continue to incorporate reverse mortgages

The last year saw more financial planners embracing reverse mortgages as part of a sound retirement plan. For some financial experts this is due to the program changes mentioned above that have made reverse mortgages safer than ever for borrowers and their spouses. Others are taking seriously the widely published research on the use of reverse mortgages in portfolio planning, touting their success in improving retirees’ chances of living off their savings.

Reverse mortgage impact: Expect more financial planners to portray how home equity can be used as a retirement planning tool through a reverse mortgage.

Most often, the thinking is that by taking out a reverse mortgage as a line of credit, a retiree can use that line of credit to protect against market swings or prevent withdrawals on other investments. It is similar to having an alternative “bucket” to draw from when income from other assets is lower than planned on.

Additionally, a reverse mortgage line of credit that is unused actually grows over time, giving the borrower access to even more funds down the road; in some cases an untapped line of credit can even exceed the value of the home itself.

A reverse mortgage is not for everyone, but increasingly, advisors are looking into reverse mortgage options for their clients.

Changes ahead

If you’re considering a reverse mortgage, you may not be able to foresee future product changes, but thinking about some of the economic realities that are likely to take hold this year is a place to start. If the predictions hold true and interest rates remain historically low and home prices continue growing, then 2016 could be a good year to consider a reverse mortgage, particularly for those thinking about the line of credit payout option.

Estimate Your Reverse Mortgage Loan Amount

Instantly find out how much you might be eligible for.