Reverse mortgage line of credit is a credit card like HECM system. Using it 62 or older people can borrow money up to a credit limit against their home equity.
According to the American Association of Retired Persons,
Around 66% of reverse mortgage takers choose the HECM with Reverse Mortgage Line Of Credit.
So, in case you are thinking about taking a reverse mortgage, you must consider the reverse mortgage line of credit. But what is a reverse mortgage line of credit?
You are about to find out. Because by the end of this post, you will get in-depth knowledge on what is it, how does line of credit work on a reverse mortgage, its interest rate, credit growth, pros cons, and everything related to it. So, stay with me till the end.
What Is A Line Of Credit On A Reverse Mortgage?
The reverse mortgage line of credit is a special type of HECM that lets the borrower get a loan against their home equity and offers payment in a line of credit.
Reverse mortgages are financial products that provide payment-free loans to retired or old homeowners. Among the 3 types of reverse mortgages, the Home Equity Conversion Mortgage, or HECM is the most popular. One of the reasons behind its popularity is it offers a line of credit.
The HECM line of credit is a bit different than any other line of credit. Because the borrowers don’t have to return the borrowed amount unless they decide to sell the house. Moreover, the unused line of credit amount will grow. So, it can be a stable source of income for retirees.
However, like any other line of credit, the reverse mortgage line of credit has also a credit limit. So, the borrowers can borrow up to a certain amount. But a borrower can return some of the borrowed money and free up the amount for future borrowing.
Let’s look at the below example to understand better.
Reverse Mortgage Line of Credit Example
Suppose, Mr. Smith has taken a HECM with a line of credit. His credit limit is $300,000. So, Mr. Smith can borrow money from the loan amount when he needs just like a credit card. But he is not required to pay the bill.
Once he reaches the credit limit of $300,000, he can not borrow more. However, he can return some of the borrowed amounts with interest. For instance, he has returned $150,000 with interest. Now he will be able to borrow again from the amount he returned.
Do You Qualify For A Reverse Mortgage Line Of Credit?
The requirements for a reverse mortgage line of credit are the same as any other reverse mortgage requirement. Here are a few of them
- The borrower must be 62 years.
- The borrower must have at least 50% or more equity in the house.
- The property owner must pay home insurance, maintenance cost, and property tax.
- The borrower must live in the home as a primary residence.
- The property owner must consult with a HUD–approved reverse mortgage counselor.
But you need to do one thing extra and that is, take a HECM with a line of credit as the payment option. However, the HUD reverse mortgage home equity line of credit is a bit strict than other reverse mortgage requirements.
How Does Interest Work On A Reverse Mortgage?
Interest on reverse mortgages works a bit differently than on regular loans. Because you don’t need to pay back a reverse unless you plan to sell or pass away and your heirs want to keep the house.
Like other mortgages reverse mortgage also has two kinds of interests they are
- Fixed Rate
- Variable Rate
Moreover, you need to add a mortgage insurance premium to it. So, your reverse mortgage interest gets added to the loan amount annually with the insurance premium depending on which type of interest rate you choose.
So, when you pass away or sell the house then the loan has to be repaid with the interest amount.
However, if the total loan amount with interest is higher than the market price of the house. Then you or your heir do not have to pay the extra amount. You just need to pay the market price of the house.
Reverse Mortgage Line Of Credit Interest Rate
A reverse mortgage line of credit only works with the variable rate interest. Because if you choose the fixed-rate reverse mortgage then the only payment option is a lump sum. So, choose a variable rate reverse mortgage if you want line of credit.
Here are the current interest rates of a Reverse Mortgage Line Of Credit
|Adjustable Rate||Margin||Credit Limit|
Moreover, private or Jumbo reverse mortgages pay a much higher amount. However, the interest rate is much higher and they are not secure.
But does the line of credit grow in a reverse mortgage?
Does A Reverse Mortgage Line Of Credit Increase?
Yes, the reverse mortgage line of credit increases.
One of the many advantages of a reverse mortgage line of credit is that it grows over a period of time. No one chooses a line of credit if they want a lump sum. So, a portion of the borrowed money remains in the bank or financial institution. And the good thing your reverse mortgage line of credit money grows no matter how small the amount is.
How Does A Reverse Mortgage Line Of Credit Grow?
The reverse mortgage line of credit growth is the same as the loan interest growth. Meaning the unused line of credit amount will grow at the same rate as the loan interest.
For example, your reverse mortgage loan has a 5% loan interest and a 0.5% mortgage insurance premium. So, you have a total of 5.5% interest on the loan. Now, the growth of the unused reverse mortgage line of credit is also 5.5%.
Reverse Mortgage Line Of Credit Pros And Cons
From my personal experience of handling reverse mortgage clients, here is what I liked about the reverse Mortgage Line Of Credit and what I disliked
What I Liked
- It’s flexible.
- You don’t need to pay the loan if you want.
- The interest rates are much lower than a credit card.
- You can take money from the line of credit whenever you want.
- You can also pay back some of the borrowed money for future use.
- The unused loan money will grow at the same rate as interest.
- HECMs are secured.
What I Disliked
- A Reverse Mortgage Line Of Credit only comes with an adjustable rate.
- There is a high loan closing cost.
- The appraisal cost is paid by the borrower.
- The borrower must go through HUD counseling with his own money.
- A reverse mortgage line of credit might affect Medicaid and SSI eligibility.
So, is taking a reverse mortgage line of credit worth it?
Do You Need A Line Of Credit With A Reverse Mortgage?
It completely depends on your personal need. However, it’s definitely recommended for its flexibility.
A line of credit is just a reverse mortgage payment option. It’s not a requirement. But the good thing about a line of credit is, even your loaned money will grow at a stable rate.
Moreover, there is no monthly payment requirement. So, you can pay back some loaned money if you want it for future needs or you can choose not to pay.
However, whether you should get a line of credit or not depends on your need. If you need an emergency lump sum then you can choose it. On the other hand, you can take a single-purpose reverse mortgage. But one thing is certain, a reverse mortgage line of credit provides the most value.