In a prior post we discussed the relationship between home value appreciation and reverse mortgages. We noted that reverse mortgages are described as rising debt, falling equity loans. Yet, in areas that have rapidly rising home prices, home equity growth can actually outpace rising reverse mortgage debt (rising debt, rising equity).

Conversely, in areas having little or negative home appreciation, the demise of home equity can hyper-accelerate as interest accrues and home values decline (rising debt, rapidly falling equity). (In these situations, the borrower remains protected by the non-recourse feature which assures reverse mortgage debt never exceeds the home’s value.)

Still, it behooves anyone considering a reverse mortgage to pay attention to the dynamics of their community’s housing market. This is especially true for borrowers hoping to leave a bequest that includes home equity.

There’s no way to know where home prices in your area will head in the future. But we thought it would be interesting and useful to take a look back and compare housing price changes (as reported by OFHEO) to the average rate of interest paid on the popular monthly-adjusting HECM reverse mortgage. The difference or “variance” between these two rates provides a simple indicator of how the rate of change in your home’s value compares to the interest accruing against your reverse mortgage.

For a simple example, assume you have a $200,000 home and take a lump-sum $100,000 reverse mortgage leaving a beginning equity position of $100,000 (50%). If both the value of your home and the interest rate on your loan remain at 4%, after 10 years you would have a home worth $296,049, a reverse mortgage balance of $148,024 and an equity position of $148,024, still equal to 50% of your home’s value.

Now if the home value grew at just 2% while the mortgage accrued interest at 4%, at the end of ten years your home would be worth $243,799 and the accrued loan balance would be $148,024 leaving a 39% equity stake ($95,775). On the other hand, if the home’s value grew at 6% while the loan remained at 4%, the end of ten years would show a home worth $358,170, a loan balance or $148,024 and equity of $210,145 (59%).

These are oversimplified examples that don’t take into account variable interest rates, irregular loan payments, and numerous other factors. Still, they help illustrate the importance of paying attention to the interplay of interest rates and home appreciation rates when contemplating a reverse mortgage.

We put together a little tool to help you in this regard using the OFHEO Housing Price Index data. You can click on any state and see the variance between average HECM interest rates for the 1- and 5-year periods ended 9/30/06 and housing appreciation rates for the same period states and/or and major metro areas within states. Here’s a sample showing average figures for the whole United States:

		One-Year			Five-Year
State	Metro Area	Home Apprec	HECM Rate	Vari- ance	Home Apprec	HECM Rate	Vari- ance
All	All	7.73 %	6.43 %	1.30 %	11.11 %	4.10 %	7.01 %

To find the HECM Rate Variance for your your community, check out our HECM Rate Variance Tool.

Social tagging: Reverse Mortgage Pitfalls > Reverse Mortgage Rates

A Few More Related Articles of Interest:

New Housing Price Index Out - HECM Variances Updated

Index Highlights Best (and Worst) Areas For Reverse Mortgages

Reverse Mortgage Friendliness Index Updated

Reverse Mortgage Friendliness Update (2Q 2007)

No Change in Maximum HECM Loan Limits (203b) for 2007