Higher interest rates have brought the mortgage industry to a halt as potential homebuyers are hesitant to commit to a purchase and borrowers who have already locked in low interest rates on their existing mortgage are unlikely to refinance at a higher rate and payment. However, there is one mortgage strategy that could benefit from today’s higher interest rates.
A Home Equity Conversion Mortgage (HECM), which is often referred to as a reverse mortgage, allows borrowers to access their home equity without having to make a payment. These loans can include a line of credit that allows borrowers to access their home equity on their own schedule as they need it, and they are not required to pay interest on the money borrowed until the money is distributed.
So, what does this have to do with higher interest rates? A HECM loan line of credit increases at the same interest rate that is applied to any balance. Therefore, the amount of money available to be borrowed will increase over time. The higher the interest rates, the larger the increase in the credit limit.
Some homeowners will use this feature to plan for their long-term retirement needs, even when they do not need the money now. As long as a retiree plans to stay in their home for the long-term, they can set up a HECM Line of Credit early in retirement to allow their credit limit to increase for many years, or even decades. That way they will have access to a larger amount of money to fund their needs, such as long-term care, later in their retirement.