Reverse Mortgage Line of Credit Option
The Home Equity Conversion Mortgage, or Reverse Mortgage is beneficial to older Americans looking for a way to supplement their fixed income during retirement or, to even plan ahead for their retirement. The fact of the matter is, not everyone retires 65, because the amount of money is less compared to retiring later in life.
However, you can apply for a reverse mortgage at the ripe age of 62, if you live in your primary residence and have enough equity in your home. If you are using a reverse mortgage to PLAN retirement, the line of credit option can prove to be very effective in the future, when the funds are needs to cover expected (and unexpected) expense.
There are many options to chose from if you apply for a reverse mortgage, and because the line of credit option is only available at an adjustable rate–instead of a fixed rate–it’s important to know why the line of credit is the best option when you’re planning for retirement: flexibility. It’s great to take out a lump sum initially but what if you need funds in the future?
The line of credit allows you control over how much (and when) you access your funds. You don’t have to immediately use it but it will be there and accessible when you need it. If you want to access your funds as you go, the fixed rate option will not work.
As a retirement planning tool, the line of credit also does not accumulate interest on any portion of the funds that are not being used. If you want to save your reverse mortgage for a rainy day, you don’t have to pay interest as long as the funds remain untouched.
In addition, the line of credit can never be frozen while there are still funds available in the account. Tough times are a reality for everyone, regardless of age, and during tough credit times, a credit line from a local bank CAN be frozen while their HECM line of credit cannot because the borrower has paid their Mortgage Insurance Premium.
In the future, if cash flow from other sources decreases the line of credit continues to grow on the portion that remains unused. If you have yet to use your funds, then the amount available to you when you finally use it will be more than what you started with. How is this possible? The unused portion of the credit line grows (giving you more money to draw from, not collecting “interest” that is taxable) at the same rate at which the loan accrues interest.
For example, if the interest rate is 2.50% and the MIP is 1.25%, then the actual line of credit growth rate rate is 2.50 + 1.25 = 3.75%. More gains than most investments out there today!
If the available funds for your loan is $393,708 (after determining the net Principal Limit and costs) and you do not use those funds then your line of credit grows monthly based on the interest rates. If these rates don’t change for 12 months, then in the first month you would take $393,708 X 3.75% / 12 months and the line of credit would have already grown by over $1,200 in just one month! Since you start the next month with a higher balance then the line of credit continues to go up even higher.
This same line of credit with an initial growth rate of 5.25% would grow from $393,708 to $918,382 in 10 years if you are lucky enough not to use those funds. If, in 10 years, you decide to retire, you have accumulated an extra $600,000 for your retirement!