Seniors Can Have a Silver Mine

Here is the second half of the previous post, discussing why the current mortgage rates and gains in equity, can be a winning situation for a senior.

The third reason has to do with housing wealth—a significant asset for many households—since the impact of changes in interest rates on the payout from a reverse mortgage is partially offset by changes in the amount that can be borrowed.

High interest rates typically produce more income on investments, and vice versa, and they also directly influence the amount that can be borrowed against the home through a reverse mortgage.

At a real interest rate of zero, for example, someone could borrow 64% of the value of the house under the federal Home Equity Conversion Mortgage program. With a 4% interest rate, though, only 30% could be borrowed, as lenders look to prevent the loan plus accumulated interest from exceeding the proceeds from the home’s eventual sale.

 

Chart credit: Issue brief authors’ calculations

Low interest rates unfavorably impact the amount earned on annuities, but there’s a silver lining, the researchers say.

“The change in the portion of the value of the house that can be borrowed offsets the direct effect of interest rates on annuity income,” says the white paper. “For example, an interest rate of zero increases the share of household at risk by 1.4 percentage points, which is the net effect of a 2.7-percentage-point increase due to lower annuity rates and a 1.3-percentage-point decrease due to the ability to borrow more against the house.”

Read the issue brief [1].

Written by Alyssa Gerace [2]

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