How Interest Rates Can Have a Big Impact on Your Retirement

Falling interest rates can often signal a negative impact on a long-term retirement portfolio, as a lower rate environment means less money saved for retirement. But low rates can also have a silver lining for retirees, especially when it comes to reverse mortgages. The Federal Reserve has been keeping downward pressure on interest rates post-recession in an effort to stimulate the economy. The thought is that people will have greater ability to afford a new home or vehicle if they’re able to borrow at a cheaper cost. But lower interest rates also mean that retiree assets don’t earn as much on what they have saved. In July 2007 the federal funds rate—the interest rate at which depository institutions actively trade balances held at the Federal Reserve—was 5.26%. Later that year the Fed began to incrementally lower the rate, which hit 0.16% in December 2008, according to data from the Federal Reserve Bank. Since then, the federal funds rate hasn’t gone up much, standing at 0.08% as of March 2014. This translates to a sharp decrease in interest rates on savings accounts, annuities, certificates of deposit, and money market accounts. Reverse Mortgages Fortunately—considering today’s rate environment—there are upsides to low interest rates, especially when it comes to reverse mortgage borrowing. If you already have a Home Equity Conversion Mortgage, refinancing in a lower interest rate environment may be an option for you. Refinancing a reverse mortgage could potentially allow borrowers greater access to their home equity. By lowering your interest rate or switching from a fixed rate to an adjustable one, you may be eligible for a larger loan. This is especially true for borrowers who are refinancing several years down the road when they’re older and qualify for more loan proceeds. It’s important to make sure the benefits outweigh the cost of the refinancing, which can include several one-time fees. Refinancing aside, there’s another upside to low interest rates: the lower the rate, the more you can borrow via a reverse mortgage, according to an issue brief from the Center for Retirement Research at Boston College. At lower rates, your balance won’t grow as much or as quickly as it would if rates were higher, giving you access to more of your home equity. “The loss from lower interest rates is slightly offset by the fact that the portion of the house that can be accessed through a reverse mortgage varies inversely with the interest rate,” the researchers say. If your retirement savings have taken a hit from today’s low rates and you’re looking to supplement your income, a reverse mortgage could help. Calculate how much you could be eligible to receive using our reverse mortgage calculator, or talk to one of our reverse mortgage specialists today.