Because we use the nearest 1/8%, HECM proposals often don’t change from week to week unless the 10-year CMT moves enough to push expected rates beyond a rounding threshold.

Higher or lower expected rates impact principal limits

Higher expected rates reduce borrowing capacity, while lower expected rates increase borrowing capacity. So, it is understandable that HECM prospects want to know how unlocked expected rates could impact their principal limit.

We cannot determine the precise percentage until we know both the relevant age and the expected rate. Depending on those two factors, the impact could be 0.4% to 0.9% of a prospect’s home value. Nevertheless, the average impact of a 1/8% change in the expected rate is a little over 0.6%.

For example, a prospect with a $500,000 home could see their principal limit drop by an average of $3,000 (0.6%) from a 1/8% increase in expected rate. Conversely, their principal limit could increase by an average of $3,000 from a 1/8% decrease in the expected rate until that rate is locked.

April 2024 update

The 10-year CMT average dipped to 4.13% for one week in March, offering higher principal limits for new applications and some loans in processing. While the index rate in effect for April 2-8 is 9 basis points higher (4.22%), the 10-year CMT has been relatively flat since early February.

Example