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Tuesday, January 27, 2009
If all else fails in the economy at least we can turn the TV on and see how interest rate continue to decline in the Fed's effort to stimulate the economy.
Tons of senior borrowers call me daily asking about the lower interest rates. Some of them are currently in escrow and they want to know how the lower rate changes things for them.
I reply the rates have gone up, not down.
It is true interest rates are extremely low. The main index used for reverse mortgage adjustable rate products is now down to .45%. However, there are more things at work here.
On the other hand those that would invest in mortgage companies were not biting at the former profit margins offered.
You gotta have people investing or the whole deal goes caput. So, profit margins increased by one percent in the last week.
It's not a small increase, at least at one time. Margins have been creeping up at 1/4 point at a time.
How this will affect people is two fold. The first is equity will be stripped away more quickly once the indexes increase to normal levels.
The other affect is a lower loan size.
The very fact that higher interest rates for the reverse mortgage takes away equity quickly is the reason lenders lend less money.
A reverse mortgage lender must take the home's equity very seriously. It is the lender's security. Therefore the lender lends less when rates go up.
How mortgage companies go out of business, as we know from recent financial trouble, is when more is owed than the home is actually worth.
Lending laws don't allow lenders to come after the owners or owner's heirs for the difference. They are stuck with the home value as collateral.
Those who will receive the biggest surprise due to the new interest rate increase are those planning on closing on their reverse mortgage in the next month.
Some of them are planning to pay off mortgages in attempt to eliminate that high payment. Some of these folks won't be able to pay that mortgage off now.
We'll see how this plays out, but it's pretty tough right now.
Tons of senior borrowers call me daily asking about the lower interest rates. Some of them are currently in escrow and they want to know how the lower rate changes things for them.
I reply the rates have gone up, not down.
It is true interest rates are extremely low. The main index used for reverse mortgage adjustable rate products is now down to .45%. However, there are more things at work here.
On the other hand those that would invest in mortgage companies were not biting at the former profit margins offered.
You gotta have people investing or the whole deal goes caput. So, profit margins increased by one percent in the last week.
It's not a small increase, at least at one time. Margins have been creeping up at 1/4 point at a time.
How this will affect people is two fold. The first is equity will be stripped away more quickly once the indexes increase to normal levels.
The other affect is a lower loan size.
The very fact that higher interest rates for the reverse mortgage takes away equity quickly is the reason lenders lend less money.
A reverse mortgage lender must take the home's equity very seriously. It is the lender's security. Therefore the lender lends less when rates go up.
How mortgage companies go out of business, as we know from recent financial trouble, is when more is owed than the home is actually worth.
Lending laws don't allow lenders to come after the owners or owner's heirs for the difference. They are stuck with the home value as collateral.
Those who will receive the biggest surprise due to the new interest rate increase are those planning on closing on their reverse mortgage in the next month.
Some of them are planning to pay off mortgages in attempt to eliminate that high payment. Some of these folks won't be able to pay that mortgage off now.
We'll see how this plays out, but it's pretty tough right now.
posted by Credit Counseling at
7:21 AM
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