When the Federal Reserve raises rates, my phone usually starts ringing.
This week, the Fed raised rates by a quarter of a percentage point. It was the first increase since 2023, and officials signaled that another increase could come before the end of the year.
That led many homeowners to ask me:
“Did I miss my chance?”
“Is my reverse mortgage about to get more expensive?”
“Should I wait?”
These are fair questions. I have specialized exclusively in reverse mortgages here in Colorado for 23 years, and I believe you deserve a straight answer without pressure.
The short answer is this: higher rates can affect how much money is available through a new reverse mortgage, and they can cause an existing loan balance to grow faster. But they do not increase a required monthly mortgage payment, because a reverse mortgage does not require one.
Let me explain how it works.
First, a quick review of the HECM
Most reverse mortgages are FHA-insured Home Equity Conversion Mortgages, commonly called HECMs. They are designed for homeowners age 62 and older.
A HECM can allow you to convert part of your home’s value into cash while continuing to live in your home. You still need to pay your property taxes and insurance, occupy the home as your primary residence, maintain the property, and keep your name on title.
However, you do not have a required monthly mortgage payment. Interest is charged, but it is added to the loan balance instead of being paid from your checking account each month.
You can learn more about the basics in my guide to how a reverse mortgage works and my explanation of what a HECM reverse mortgage is.
Why most homeowners choose an adjustable-rate HECM
Many people initially tell me they want a fixed rate. I understand that instinct. For most of our lives, a fixed-rate mortgage has felt like the safer choice.
But fixed-rate HECMs are currently near 8%, and they come with an important limitation. You generally take the available money in one lump sum at closing. You do not have the same line-of-credit or monthly-payment flexibility.
There is another limitation, too. FHA limits how much you can take during the first year. If you do not have a line of credit available, you may not be able to draw additional money later.
The monthly adjustable HECM works differently. It currently has the lowest available rate among HECM options, which can mean more money is available. It also gives you choices:
- Take cash at closing.
- Establish a line of credit.
- Set up monthly payments to yourself.
- Combine these options.
- Draw only what you need from the line of credit.
That flexibility is why most of the HECMs completed in my office use the adjustable-rate option.
Why an adjustable rate does not change your monthly cash flow
When people hear “adjustable rate,” they often think of a traditional mortgage payment that can suddenly rise.
With a regular mortgage, that concern is very real. If your interest rate rises, your required payment may increase. Your income may stay the same while your housing expense becomes larger.
A reverse mortgage is different because there is no required monthly mortgage payment. If the interest rate rises, there is no mortgage payment to increase.
Your monthly cash flow from the loan does not change. You still have the responsibility to pay taxes and insurance and meet the other loan requirements, but the mortgage itself does not send you a larger monthly bill.
That does not mean a rate increase has no effect. It affects the balance sheet.
What a higher rate does to your loan balance
Interest is added to the reverse mortgage balance. When the rate rises, the balance grows faster.
For example, suppose your loan balance is $200,000. If the interest rate increases by one-half of one percentage point, that is approximately $1,000 more in interest over a year, or a little more than $80 per month.
That amount does not come out of your checking account. It is added to the loan balance and is generally settled when the home is sold or the loan otherwise becomes due.
The tradeoff is that a larger balance can mean less remaining equity for you or your heirs later. I do not want to minimize that. It is an important part of the decision.
Because a HECM is a non-recourse loan, your heirs can never owe more than the home is worth. But the interest still matters. It matters on the balance sheet, not the grocery budget.
My honest advice is simple: if watching the loan balance grow would cause you more stress than the reverse mortgage benefits would relieve, do not take the loan. A reverse mortgage is not right for everyone.
The surprising benefit of an unused line of credit
There is another part of the rate discussion that many people do not expect.
Suppose FHA makes $200,000 available to you, but you only need $100,000 to pay off your existing mortgage. The remaining $100,000 can be placed in a line of credit rather than taken immediately.
That unused line of credit grows at the same rate you are charged on borrowed funds.
So, when interest rates rise, the balance you have borrowed grows faster. But the unused portion of your line of credit can also grow faster.
I have had clients in Lakewood and Westminster call me because they were pleased to see their available line of credit growing. They had additional funds available for future needs, such as a repair, medical expense, or other unexpected cost.
If they never use that money, it never has to be repaid.
An adjustable HECM has two different interest rates
One of the most important things to understand is that an adjustable-rate HECM has two separate rates. They perform different jobs.
1. The expected rate: “How much can I get?”
The expected rate helps determine how much money can be made available to you.
FHA uses this rate in its calculations along with your age and home value. You are not charged this rate. It is a measuring tool used to determine the available loan amount.
The expected rate is based on the 10-year U.S. Treasury index plus the lender’s margin.
A lower expected rate generally means more money is available. A higher expected rate generally means less.
The expected rate moves in steps of one-eighth of a percentage point and is adjusted weekly using the prior week’s average. Even a one-eighth-point change can affect the available amount by roughly $2,000 to $5,000, depending on your age and home value.
A full one-point increase can reduce available funds by approximately $16,000 to $40,000. The recent increase of five-eighths of a point could represent roughly $10,000 to $25,000, depending on the homeowner’s situation.
The younger you are and the less expensive your home is, the smaller the impact may be. The older you are and the more valuable your home is, the greater the impact may be.
2. The initial rate: “What does it cost?”
The initial rate is the rate charged on money you borrow. It is based on the one-year U.S. Treasury index plus the lender’s margin.
For example, the one-year Treasury index was around 3.95% in mid-August and rose to approximately 4.45% this week. With a 2% margin, that would change the example rate from:
- 3.95% plus 2% = 5.95%
- 4.45% plus 2% = 6.45%
There is also an FHA mortgage insurance charge of 0.5% per year based on the loan balance. That insurance helps provide protections such as the non-recourse feature and the HECM line-of-credit guarantees.
The initial rate is recalculated monthly. If the one-year Treasury rises, your rate can rise. If it falls, your rate can fall automatically. You do not need to refinance or call anyone to make that adjustment.
There is also a lifetime cap. With a 2% margin, for example, a starting rate of 6.5% could not increase more than five percentage points above that starting rate.
Both rates are built from two parts:
- Index: A published rate influenced by financial markets.
- Margin: The lender’s fixed addition to the index.
The index moves. The margin is fixed for the life of the loan, so it is worth comparing lenders and asking questions about it.
The expected rate locks when you apply
One point I want you to remember is that the expected rate is locked as of the application date.
If rates rise while your loan is being processed, that should not dramatically change the amount available to you under the locked terms. FHA allows time to complete the process, and the rate used for the principal-limit calculation is protected once locked.
If rates come down, the lender may be able to offer the lower rate. That could potentially provide a little more available money.
The important lesson is that rates move in both directions. The index has been above 5%, and it has also been near zero. Trying to predict the perfect time to apply is difficult.
What if the HECM does not provide enough money?
Sometimes higher expected rates reduce the HECM proceeds enough that the loan no longer accomplishes your goal.
For example, if you need to pay off an existing mortgage, a smaller available amount could determine whether the reverse mortgage works.
In that situation, a proprietary reverse mortgage may be worth exploring. A proprietary loan is a private reverse mortgage rather than an FHA-insured HECM. It does not use the same FHA tables and may not react as sharply to changes in the 10-year Treasury. Some proprietary programs are also available to homeowners as young as 55.
That does not automatically make a proprietary loan better. It simply means you may have more than one option. I can explain the differences so you can decide whether either program fits your situation.
My five takeaways
Here is what I want you to remember:
- Most HECMs are adjustable because they offer a lower rate, more available money, and greater flexibility.
- A rate increase does not change your monthly mortgage cash flow because there is no required monthly payment.
- There are two rates: the initial rate determines what you are charged, while the expected rate helps determine how much you can receive.
- The expected rate locks on the day you apply.
- Rates move both ways. They can rise, and they can come down.
If you would like to review your numbers, call me directly at 303-513-2748. I can explain the options with no cost, no obligation, and no pressure. You can also explore my answers about reverse mortgage interest rates, payout options, and how the line of credit works.
To my fellow veterans: my offer still stands. I cover the cost of your appraisal and title insurance.
Take your time, ask questions, and decide based on your own goals. A reverse mortgage is not for everyone, but a clear conversation can help you understand whether it may provide useful financial relief in your Colorado retirement.
