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High interest rates change reverse mortgage borrowing and payout levels
HousingWire reports that higher rates lower the principal limit factor, cutting how much cash borrowers can access upfront, while balances can grow faster over time.
Reverse mortgage activity is holding up even as macroeconomic uncertainty and elevated interest rates persist, according to HousingWire. Industry professionals said the main impact of higher rates shows up through reverse mortgage mechanics rather than through the upfront payment levels typical of forward mortgages.
With higher rates, the principal limit factor (PLF) falls in reverse mortgages, which means borrowers can tap a smaller share of their home’s appraised value for upfront cash. At the same time, those higher rates can cause loan balances to increase faster over time, potentially leaving borrowers and their heirs with less remaining equity.
HousingWire also said higher rates can accelerate growth for unused lines of credit in adjustable-rate reverse mortgage products, which may further deplete overall equity. Shain Urwin, national manager of reverse mortgages at C2 Financial, said more affluent borrowers are using the line of credit more in the higher-rate environment, while needs-based borrowers are less influenced by rate psychology because their finances drive their immediate need for funds.
Urwin compared outcomes during COVID-19, when rates were around 3%, to today, when rates are closer to 6%, saying the equivalent loan-to-value access for a 62-year-old dropped from about 50% to around 30%. HousingWire added that Loren Riddick, national director of reverse lending at NEXA Mortgage, said he has “never been busier” as seniors seek access to untapped home equity, and that the unused line of credit growth rate is around 7%.