The American Association of Retired Persons (AARP), a nonprofit, nonpartisan organization that advocates for Americans aged 50 and older, warns that rising interest rates will reduce reverse-mortgage payouts.
Bruce Simmons, reverse-mortgage specialist at American Liberty Mortgage in Denver, helps prospective applicants understand how reverse mortgages work, and told AARP he has been fielding more questions about reverse mortgages lately due to rising interest rates.
“It has caused some anxiety among a lot of people who are new retirees or want to retire,” Simmons said. "There are so many people who can benefit from this today, even with the rates the way they are,” he added.
For a reverse mortgage, homeowners borrow against the principal and have to pay it back with interest when they sell the house or die. So, higher interest rates mean that existing reverse-mortgage holders or their heirs will owe more as interest rates rise.
Rising rates also reduce homeowners' borrowing amount against their home equity. The threshold is called the “principal limit factor,” which is based on the borrower’s age, the home’s value, and the current interest rate. Essentially, homeowners can’t owe more than what the house is worth. The higher the interest, the more he or she will ultimately owe.
“As interest rates rise, the loan balance increases at a faster pace,” Simmons said. “We’re going to loan them less money to start out with.”
Simmons explained that the owners of a home valued at $500,000 might once have been able to get a $250,000 reverse mortgage. Now, they would be limited to $175,000.
Interest rates have ballooned from near zero to between 5.25% and 5.5% as the Federal Reserve tries to restrain inflation — a 23-year high. The Fed has now raised interest rates 11 times since March 2022.
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