What is a Reverse Mortgage Credit Line and What is the Credit Line Growth Rate?
Are you considering an HECM aka a Reverse Mortgage? If so, you’re probably aware that Reverse Mortgage borrowers can receive their loan payments in the form of a lump sum, monthly payments or a line of credit. Sometimes borrowers can even choose to receive their Reverse Mortgage proceeds through a combination of these. There are pros and cons related to each of those options, but choosing an HECM credit line may offer more significant benefits for borrowers, as the credit line can actually increase over time.
How it Works
With a HECM credit line, lenders establish a line of credit that the homeowner can draw against. The amount of the credit line can vary depending on the amount of equity the homeowner has, in addition to other factors.
After the HECM credit line is established, the homeowner doesn’t necessarily have to start using it right away. In fact, it’s wise to refrain from using the credit line for as long as possible. This is because HECM credit lines are subject to growth. Whatever amount is not drawn will be able to grow over time, similar to a savings account but with a higher rate of growth.
The HECM credit line can be used for whatever the homeowner wants. Whether they need to complete home improvement or remodeling projects, install handicap-accessible features or aging-in-place modifications, pay off major medical expenses, pay for nursing home care for a spouse, or simply have help with day-to-day living expenses, an HECM credit line can provide financial relief for many senior homeowners who are struggling with fixed incomes. And since the credit line can increase over time, homeowners who may not need the money now but anticipate having large expenses later on in life, may feel more secure with this structure instead of receiving a lump sum or monthly payments.
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Setting Up Your HECM Credit Line ASAP
HECM borrowers may want to set up a credit line as soon as they are able, as opposed to waiting until they are older. This is because the sooner you set up your HECM credit line, the more you may be able to draw later on. This is because HECM credit lines are structured so that forbearance is rewarded by regular and continual growth of the unused portion. In other words, if you set up the line of credit but don’t use it, the amount available to draw will increase over time. Currently, the HECM credit line growth rate is the interest rate on the mortgage plus the FHA’s 1.25% annual mortgage insurance premium rate. So, for example, if your mortgage rate is 4.00%, your HECM credit line can increase by 5.25% per year.
Benefits & Risks
Because a Reverse Mortgage credit line allows borrowers to draw funds at their discretion, it gives them the ability to control how much debt they actually take on. On the other hand, having the freedom to draw from the line of credit at will, presents the risk of being tempted to draw too much too quickly.
The key is to set goals and realistic limits when it comes to handling your Reverse Mortgage credit line. Some experts suggest drawing only on the credit line’s growth when it comes to luxury purchases or small expenses, and leaving the original line in place for emergencies.
Where to Go for More Information:
1. Begin by doing research online – but be careful. A good place to start is our comprehensive Reverse Mortgage Learning Center. Browse dozens of articles on the benefits and risks of Reverse Mortgages and find the answers to the most frequently asked Reverse Mortgage questions. Remember, not everything written on the Internet is true. While some websites seek to educate and inform prospective borrowers, others may aim to target seniors and exploit their lack of knowledge on the subject in order to gain their business. Although there are laws in place to protect seniors and punish predatory lenders, scammers are still out there. Just remember, if something sounds too good to be true, it probably is.
2.Contact your financial planner or financial adviser to discuss your situation and to see if a Reverse Mortgage Credit Line makes sense for you. If you do not have a financial adviser or planner, you may be able to work with a financial professional for free or reduced cost through your local senior center.
Want to speak with one of our Reverse Mortgage specialists? Simply give us a call at (855) 367-4326