Reverse Mortgage Line of Credit Explained – Yay or Nay?
You may or may not have heard of a reverse mortgage line of credit. Either way, we aim to help you make an informed decision about the HECM line of credit and perhaps about reverse mortgages in general.
The reverse mortgage line of credit is the most popular option among older homeowners that take out a reverse mortgage. According to AARP.com, about “2/3’s of homeowners that use a reverse mortgage, opted for the line of credit option”.
First, What Is A Reverse Mortgage?
A reverse mortgage is a special type of loan for homeowners aged 62 and older. Or, If you’re not a homeowner, you CAN use a reverse mortgage to purchase a home. What’s so special about a reverse mortgage, is that you don’t need to make any payments to the bank or mortgage company. Yes, there is no payment due for as long as you live of for as long as you reside in your home.
Keep in mind that you still own the home just like if you took a regular loan out. That said, you’ll still need to make sure to maintain and pay your insurance and your property taxes and any other homeowner required expenses (like HOA payments).
Keep in mind, this is just a really basic synopsis of the reverse mortgage. You can find out more about this type of loan at this page –> Reverse Mortgage info.
What Is A Line of Credit AKA LOC?
According to Investopedia.com “A line of credit (LOC) is an arrangement between a financial institution, usually a bank, and a customer, that established the maximum amount of a loan that the customer can borrow. The borrower can access funds from the line of credit at any time, as long as he or she does not exceed the maximum amount set in the agreement and meets any other requirements, such as making timely minimum payments.”
Usually, you will have access to your credit line for about 10 years (assuming you don’t max it out). This initial 10 year period is called a “draw period”. During the draw period, your minimum monthly payments are usually interest only. Once the draw period is up, the bank will normally amortize your payments over the next 20 years. This usually means a big jump in the minimum monthly payment for those individuals that were making interest only payments. If you want to continue to have access to credit after your initial draw period, you’ll
have to requalify for the loan.
One of the drawbacks of a regular line of credit is that the bank can shut it down at any point. For example, if property values decrease significantly, they can shut down your access to more money. Makes sense right!? The house is the collateral. It’s the main guarantee they will get paid back.
What’s Unique and Special About a Reverse Mortgage Line of Credit?
There are a few unique things about a reverse mortgage line of credit that come to mind.
- First, a reverse mortgage is guaranteed for as long as you live or for as long as you live in your home. This is one of the many pros of reverse mortgage. It doesn’t matter if you live (or live in your home) for 1 year, 3, years, 15 years, or 20 years or more. With a reverse mortgage line of credit, your line of credit is still available and won’t shut off at the 10 year mark like a regular home equity line of credit.
Also, it’s still guaranteed for you even if the value of your home decreases. On the flip side, a regular line of credit can be shut off if/when home values go down.
- This is BIG TIME – Reverse Mortgage Lines of Credit Grow Over Time. Let’s say that you have access to a total amount of $120,000. Let’s also assume that you use $20,000 at closing for a few items and the reverse mortgage closing costs. Hence, you have $100,000 in an available credit line. Your $100,000 in available credit will grow at whatever your interest rate is plus another .5%. So, if your interest rate is at 4.75%, then your $100,000 credit line grows at 5.25% (your interest rate of 4.75% plus the extra .5%). So, after one year of not touching the $100,000.00, this line of credit would grow to about $105,389 (it’s compounding interest). After just two years (assuming you don’t use it), it grows to $111,070. After 15 years, it grows to $219,777. And, if interest rates go up, it will grow even faster. If you never use it, that’s fine. However, when and if you need it, it’s there and you won’t have to worry about creating an extra monthly payment by using the money (for as long as you live or for as long as the home is your primary residence)
A Quick Recap of the Differences Between a Reverse Mortgage Line of Credit vs A Regular Home Equity Line of Credit (aka HELOC)
Get Your Free Reverse Mortgage Info Kit
-Limited access period for credit.
-Not negative amortizing.
-Can be done with a Broker Price Opinion (BPO) in many cases (no full appraisal required).
-Has a monthly payment if you use the credit.
Reverse Mortgage Line of Credit:
-It is Guaranteed for life of however long you live in your home.
-Your Unused credit grows over time.
-It is Negative amortizing loan if you don’t make payments.
-A Reverse Mortgage LOC Requires a full appraisal.
-There are No monthly payments required for life (or until you move out permanently).
Both of these financial vehicles are great ways to access cash. Which option would work best for you? What do you think? Yay or Nay on a reverse mortgage line of credit? Our favorite is the reverse options. However, we also recognize that not every financial tool is for everyone. Either way, We can assist you with both.
The reverse mortgage has proven to be a good financial vessel for over a million older homeowners.