Can a reverse mortgage line of credit provide financial security?
A reverse mortgage line of credit is exactly what it says it is… It is a line of credit on a reverse mortgage. Mmmm… that doesn’t really clear it up at all, does it?
Reverse mortgages can be difficult to understand. We’ll break it down piece by piece:
A reverse mortgage is a loan — a specific type of loan for homeowners age 62 and over.
- If you own your home outright with no existing mortgage or if you have built up sufficient equity, then a reverse mortgage enables you to convert your home equity into money that you can use however and whenever you want. You can take this money as cash, monthly payments, a line of credit or some combination of these monies.
- If you are still making mortgage payments, then the reverse mortgage will pay off that mortgage and eliminate monthly mortgage payments (your traditional mortgage balance is rolled into the reverse mortgage).
With a reverse mortgage, you are borrowing your own home equity. But, the most unique thing about a reverse mortgage loan is that there are NO mortgage payments on the loan until you die or permanently move out of the house. Furthermore, you still own the home and get to use it for as long as you want.
The reverse part of the loan is that: instead of paying interest and paying down the loan amount every month, as you would with most traditional loans, you accrue interest on the reverse mortgage loan amount and the amount you will eventually owe on the reverse mortgage grows over time. The interest gets added to the amount you have borrowed.
This might sound kind of ominous — a loan that keeps growing. However, you will never ever owe more on the reverse mortgage than the value of the home at the time the loan comes due. And, many people do retain equity in their home that can be used as an inheritance or on other needs later in life.
A line of credit is a source of money that is made available to you by a financial institution. While, there are many different types of lines of credit, you do not pay interest on the money that is available to you until you withdraw the funds from the line of credit.
So, when you have a reverse mortgage line of credit, you have money that is available to you — but you only accrue interest on the money you withdraw. So, the reverse mortgage line of credit acts as an excellent low cost back up source of funds.
In addition to being a great safety net option, other key benefits to a reverse mortgage line of credit include:
Growth: Not only are you not paying interest, but your untouched reverse mortgage line of credit can grow in value. Money in a reverse mortgage line of credit grows at the same rate as the interest accrued on the loan, including the .5% mortgage insurance premium. So, if the fully loaded interest rate on your reverse mortgage is 4.00%, then your line of credit will grow at 4.5% (4.0% + .5%).
Unique: This growth is unique to reverse mortgage lines of credit — a HELOC for example does not grow.
Hedge Against Falling House Prices: The growth in a reverse mortgage line of credit is guaranteed — without withdrawals, your line of credit is guaranteed to grow.
This feature can be an interesting hedge to the potential of falling home prices. If you think home prices will be stagnant or potentially fall, then a reverse mortgage line of credit allows you to lock in the current value of your home and continue to see your assets grow.
No. A reverse mortgage line of credit is just one way to take funds. In fact, most people take their reverse mortgage loan amount in a variety of ways — sometimes determined by their own wants and needs and sometimes determined by the rules governing reverse mortgages.
- Your reverse mortgage loan amount must first be used to pay off any other existing mortgages or liens on your home. And, in some cases, money must be set aside to be used to fund ongoing taxes and insurance for the home.
- Any remaining money can be taken as cash, a line of credit, as monthly payments or some combination.
Most people who secure a reverse mortgage do so because of:
- The desire for financial independence
- The wish to remain in their own home for the rest of their lives
For those with some savings — but perhaps not enough to feel comfortable throughout retirement — the line of credit option provides instant access to cash to optimize drawdown strategies when unexpected expenses arise and during market downturns. If you get the line of credit now, the amount you can borrow grows as you age, effectively locking in immediate access to home equity when you need it most.
