Reverse mortgages often are described as “rising debt, falling equity” mortgages. As funds are drawn and interest accrues on the loan balance, the total amount owed increases tending to reduce home equity over time. This is illustrated by the following example (closing costs, fees and other considerations are not included to keep things simple):

Assumptions:
Monthly Loan Advance	$300
Monthly Interest Rate	0.50%	6.00%	Annual
Original Home Value	$100,000
Annual Appreciation Rate	3.00%
End of Year	Principal Advances	Interest	Loan Balance	Home Value	Net Equity
1	$3,600	$119	$3,719	$103,000	$99,281
2	7,200	468	7,668	106,090	98,422
3	10,800	1,060	11,860	109,273	97,413
4	14,400	1,910	16,310	112,551	96,240
5	18,000	3,036	21,036	115,927	94,892
6	21,600	4,452	26,052	119,405	93,353
7	25,200	6,178	31,378	122,987	91,609
8	28,800	8,233	37,033	126,677	89,644
9	32,400	10,636	43,036	130,477	87,441
10	36,000	13,410	49,410	134,392	84,982

But this isn’t always the case. While interest rates charged on reverse mortgages are (by type of loan) pretty much the same everywhere, home appreciation rates are far from uniform. The Office of Federal Housing Enterprise Oversight (OFHEO) publishes a quarterly House Price Index that shows the wide variations in housing values around the country.

We thought it would be interesting to take an example like the one above and substitute OFHEO housing appreciation figures for the last five years (ended 9/30/06) and actual HECM-monthly interest rates for the same period. According to OFHEO, average national housing prices have increased 55.553% over the last five years or about 11.1% per year (i.e. 55.553%/5). At the same time, interest rates charged on HECM monthly adjusting reverse mortgages (the most popular type) averaged only 4.1%.

Assumptions:
Monthly Loan Advance	$300
Monthly Interest Rate	0.34%	4.10%	5-yr Avg
Original Home Value	$100,000
Annual Appreciation Rate	11.10%	5-yr Nat’l Avg
End of Year	Principal Advances	Interest	Loan Balance	Home Value	Net Equity
1	$3,600	$81	$3,681	$111,100	$107,419
2	7,200	316	7,516	123,432	115,916
3	10,800	711	11,511	137,133	125,622
4	14,400	1,273	15,673	152,355	136,682
5	18,000	2,008	20,008	169,266	149,258

Clearly, the last several years have been somewhat of a “Golden Age” for reverse mortgage borrowers. As shown, historically low interest rates coupled with rapidly rising home prices have, for many homeowners, meant rising net home equity even as reverse mortgage loan balances grew. Nationally, the spread between home price appreciation (11.1%) and reverse mortgage rates (4.1%) has been an astounding 7%.

Of course, two caveats are in order:

• First, as with any financial review, it must always be understood that “past results are no guarantee of future performance.”
• Second, the above results are based on the national average home price appreciation. Clearly, averages can hide wide disparities in the underlying data. Some parts of the country saw home appreciation rates that exceeded the national “average” while many other sections saw home prices grow only modestly.

To illustrate, we show below the same example as above substituting for the national 5-year home price appreciation average rates for the fastest (Bakersfield, CA) and slowest (Anderson, IN) appreciating markets (according to OFHEO):

Assumptions:
Monthly Loan Advance	$300
Monthly Interest Rate	0.34%	4.10%	5-yr Avg
Original Home Value	$100,000
Annual Appreciation Rate	28.36%	5-yr Avg	Bakersfield, CA
End of Year	Principal Advances	Interest	Loan Balance	Home Value	Net Equity
1	$3,600	$81	$3,681	$128,360	$124,679
2	7,200	316	7,516	164,763	157,247
3	10,800	711	11,511	211,490	199,979
4	14,400	1,273	15,673	271,468	255,796
5	18,000	2,008	20,008	348,456	328,448

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Assumptions:
Monthly Loan Advance	$300
Monthly Interest Rate	0.34%	4.10%	5-yr Avg
Original Home Value	$100,000
Annual Appreciation Rate	1.04%	5-yr Avg	Anderson, IN
End of Year	Principal Advances	Interest	Loan Balance	Home Value	Net Equity
1	$3,600	$81	$3,681	$101,040	$97,359
2	7,200	316	7,516	102,091	94,575
3	10,800	711	11,511	103,153	91,642
4	14,400	1,273	15,673	104,225	88,553
5	18,000	2,008	20,008	105,309	85,301

In a future post, we’ll look more closely at the level of “reverse mortgage friendliness” for various housing markets around the country.

Social tagging: Reverse Mortgage Rates

A Few More Related Articles of Interest:

Is Your Community Reverse Mortgage Friendly?

Thoughts on Reverse Mortgages in a Down Housing Market

HPI - House Price Index

Zillow.com Online Home Value Estimates - How Good?

OFHEO - Office of Federal Housing Enterprise Oversight