Unfortunately, many eligible homeowners do not know that reverse mortgage proceeds can be allocated into a line of credit. The HECM line of credit program allows for borrowers to access funds needed immediately, and creates a reserve for future use. With this tool, homeowners can free up cash today and prepare for the uncertainties of tomorrow. This program can be utilized for a variety of reasons: home improvement, debt consolidation, emergency savings, vacation fund, etc. So how might this differ from a conventional home equity line-of-credit (HELOC) with a bank or credit union?
Conventional HELOCs require monthly payments to be made to the lender. They also are contingent upon the health of the real estate market. In the past, borrowers have had their HELOCs cut in half, if not completely eliminated, when the market declines. This may be a great option for those who would like to have access to smaller amounts of equity and do not mind the monthly payment. Also, standard home equity lines of credit usually have more stringent income and credit qualifying parameters.
One of the best aspects of the reverse mortgage line of credit program option is the fact there is no monthly payment requirement. As long as the home remains the borrower’s primary residence, and all property expenses are kept current, the borrower does not need to make monthly payments to the lender. Given that this is a federally insured loan, borrowers are also protected from unforeseen market volatility. Now borrowers do not have to worry about losing their HECM HELOC fund if there is a crash in the real estate market. The reverse mortgage provides more repayment flexibility than the conventional HELOC program. Additionally, the reverse mortgage line of credit has a growth factor, increasing the amount of accessible proceeds over time. Let’s review a few scenarios to see how this works.
*Disclaimer*- All examples are hypothetical. If you’d like to receive an accurate quote, seek the consult of a licensed loan officer. Click here to request a brief consultation.
Here are some examples of couples considering a lump sum reverse mortgage who own their house "free and clear".
Property Value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.524 x $200,000) = $104,800
Given this criteria, a borrower will be qualifying for $104,800. Assuming the closing costs total around $4,880*, the borrower is left with $99,920 in accessible proceeds. If they do not want to access anything immediately at closing, they can keep all $99,920 in the line of credit. As mentioned earlier, there is a growth factor associated with this program. These proceeds will continue to grow by the total rate of interest being charged on the loan balance (Initial Interest Rate + Ongoing Mortgage Insurance Rate). The growth factor will adjust over time in accordance with the interest rate.
Let’s look at the same example in which the borrower is now 15 years older.
Home value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.631 x $200,000) = $126,200
Given this criteria, the borrower will be eligible for $126,200. Assuming the closing costs total around $4,880*, the borrower is left with $121,320 in accessible proceeds. If they do not want to access anything immediately at closing, they can keep all $121,320 in the line of credit.
As we can see, waiting fifteen years made a difference of $26,280 in initial accessible proceeds. Although that is a sizable sum of money, do not overlook how powerful the growth factor can be the longer a line of credit is open. In many instances, establishing a smaller line of credit at a younger age is a better idea than waiting a few years.
If anything is to be gained from reviewing these hypothetical examples, please know this; It is imperative you seek the consult of a licensed professional. Once they know your goals, and objectives, they can properly advise you on the most appropriate solution
We have listed some of the pros and cons of the reverse mortgage line of credit program below.
HECM Line of Credit Advantages:
The less you use today, the more you leave behind tomorrow.
If you decided to not access funds at closing, the initial loan balance will only be the closing costs associated with setting up this loan. The loan balance over time is minuscule in comparison to the line of credit proceeds. This in particular is great for borrowers who may not live in the home long-term, or those concerned about the amount of equity inherited by heirs.
Fantastic for borrowers not comfortable with their savings/401k accounts
For some, this program truly gives a peace of mind knowing they have a “rainy day fund” for unforeseen future expenses. Whether it be medical expenses, home improvements or taking that trip of a lifetime; the reverse mortgage truly helps improve overall lifestyle.
No monthly payments!
As opposed to conventional Home Equity Lines of Credit (HELOC), there is no monthly payment obligation. This puts more money back in your pocket knowing you do not incur more revolving debt.
As time progresses, so do accessible funds
Although the FHA sets disbursement limits on the funds you can initially access, over time borrowers can access much more.
This is a great way to secure steady growth that is difficult to find in today’s marketplace
It is near impossible to find a financial tool available today that is federally insured and offers comparable growth potential.
HECM Line of Credit Disadvantages:
This is an adjustable rate program
The HECM line of credit is an adjustable rate program. Although there are a few protections to ease volatility, the interest rate can increase over time. The good news if interest rates increase… so does the line of credit growth factor!
Closing costs may be higher than other available options
Costs including a one-time upfront mortgage insurance premium, origination and third party fees can be much higher than other financial products that may be available. Although this option may be costly in the short term, it is very competitive over the long run.
Is it better to wait or do this now?
For this particular program option, we recommend investigating the loan process sooner rather than later. As stated in the example, the line of credit growth factor is very commonly overlooked. That growth alone can be more powerful than being a few years older. Also, the future is never guaranteed. What good would this do if you delay 10 years and the real estate market declined? Not only will your line of credit be much smaller than what was available today, but also the fact this program changes routinely. What is being presented today may not be available in the near future.
To advise with complete certainty, we highly recommend speaking with a HUD approved counseling agency. Not only is it the first step in the loan process, but it is a way to get reliable information from a non-biased source.