One common obstacle I encounter is what I call FOBF, or the “Fear of Being First.” Most people would be surprised to see how many of their neighbors have already utilized a Home Equity Conversion Mortgage (HECM), or reverse mortgage, to extract some profit from their home. A simple search of their zip code could reveal the prevalence of this option.
Often, I hear clients or their advisors say, “Let’s wait and see what the Fed does.” However, this can be the wrong strategy because many don’t understand that Federal Reserve actions may not impact HECM rates — or if they do, it’s often not in a beneficial way. HECM rates are influenced by the performance of the 10-year Treasury, not the Fed’s rates.
For example, in the past three months (August-October 2024), people have questioned why the 10-year Treasury yield is rising even though the Fed cut rates by 50 basis points. The reason is that the Fed only controls the overnight rate, which is the shortest-term lending rate used between banks — comparable to a 24-hour Treasury bill (which, of course, doesn’t actually exist). In contrast, the 10-year Treasury yield is on the longer end of the bond yield spectrum. It is a forward-looking index, meaning any anticipated moves by the Fed are priced into the 10-year yield immediately. Therefore, the Fed’s actions often have little impact on the 10-year Treasury when they actually occur.
So, if you or your clients are waiting for a rate drop as it relates to a HECM, there is usually minimal to no benefit from waiting. In fact, there can be a disadvantage, since the money could have been growing and compounding in a line of credit during those months. Just some food for thought!
Keep in mind that the rate on a HECM does not come with a mandatory payment obligation of monthly mortgage payments*; instead, it determines how much the mortgage balance increases each month. Here’s an example of why waiting may not be beneficial: Suppose someone has $100,000 available in a line of credit, growing at today’s rate (compounded monthly, for this example). If they decide to wait six months, hoping for an event like an election or a Fed meeting to cause a favorable rate change, they could miss out on the compounded growth during that period.
Even if the 10-year Treasury yield drops by a quarter of a point over those six months, the difference would typically only result in a few hundred dollars. Locking in the line of credit earlier could secure a growth window with a defined floor and ceiling of guaranteed earnings, which seems more reliable than waiting on the Fed’s unpredictable decisions.
In the end, the Fed’s actions might have no impact on the line of credit’s earnings over those six or three months, or we might even start with a higher or lower rate. Remember: a lower rate equals slower growth in the line of credit, while a higher rate means faster growth. If you have any questions about this or other scenarios, I’m here to educate.
Donald Battista, NMLS ID 2030959. *Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Arizona Mortgage Banker License 0926603. Florida Mortgage Lender Servicer License MLD1827. Louisiana Residential Mortgage Lending License 1025894. Oklahoma Mortgage Lender License ML012498. Texas Mortgage Banker Registration 1025894. These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. Subject to credit approval. For licensing information, go to: www.nmlsconsumeraccess.org | Equal Housing Lender