How Reverse Mortgage Rate Increase Changes Things
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.
Seniors more so than others keep track of these things. So, I get a lot of phone calls asking me how the low rate will alter their loan. They assume it will change it for the better.
Much to their shugrin I explain that rates have gone the other way.
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.
So, Fannie Mae has increased their profit margins by 1% in the last two weeks. This is not a minor change.
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.
And secondly, would-be borrowers will receive smaller loans.
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.
The lender is stuck in this case. All they can get out of the loan, at that time, is the sale price minus closing costs. The law prohibits any more.
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.
A good number of these people are in difficult financial positions and are attempting to pay off their forward mortgage with a reverse. This may not happen now.
We'll see how this plays out, but it's pretty tough right now.
Seniors more so than others keep track of these things. So, I get a lot of phone calls asking me how the low rate will alter their loan. They assume it will change it for the better.
Much to their shugrin I explain that rates have gone the other way.
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.
So, Fannie Mae has increased their profit margins by 1% in the last two weeks. This is not a minor change.
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.
And secondly, would-be borrowers will receive smaller loans.
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.
The lender is stuck in this case. All they can get out of the loan, at that time, is the sale price minus closing costs. The law prohibits any more.
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.
A good number of these people are in difficult financial positions and are attempting to pay off their forward mortgage with a reverse. This may not happen now.
We'll see how this plays out, but it's pretty tough right now.
posted by Credit Counseling at
7:39 AM
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