If you’re thinking about taking out a reverse mortgage, it’s important to understand all of its unique features.
Did you know that the federally-insured home equity conversion mortgage (HECM) program has a loan payment option that actually grows over time, thereby increasing your borrowing capacity?
The HECM program allows homeowners aged 62 and older to access the home equity they’ve built up in the form of a non-recourse loan.
As a borrower, you can spend your loan proceeds however you see fit, but you are required to stay current on your homeowners insurance and property taxes and maintain your home.
Reverse Mortgage Payment Options
Borrowers can choose to receive their reverse mortgage funds in a few different ways, including monthly term or tenure payments, as a line of credit, or some combination of these options.
Term payments mean your funds would be split evenly across a predetermined amount of time. For example, with a $100,500 reverse mortgage loan, you could opt to get $1,500 a month for 67 months.
If you go the tenure route, you would receive a pre-set monthly amount that depends on factors including your age, life expectancy, and loan amount, for as long as you remain in your home.
While payments for the rest of your life sound great, the line of credit option has a feature the others don’t: ongoing growth.
The unused portion of a HECM line of credit actually grows over time, at the current interest rates plus 1.25% monthly. So if the interest rate is 3.5% in a given month, your unused line of credit would grow by 4.75%.
Assuming the interest rate remained the same for a year, and your unused reverse mortgage proceeds totaled $100,000, your credit line would grow by an additional $3,958 a year (100,000 x .475 / 12).
That means if you take out a reverse mortgage but don’t access your loan for a certain period of time, your proceeds will grow substantially compared to if you immediately access and drawdown the loan.
Credit Line Growth Examples
Say a 73-year-old borrower with a home worth $400,000 takes out a reverse mortgage. If he chooses the tenure payment option, he would receive $1,695.71 each month for the rest of his life.
However, if the same borrower decides to access his loan proceeds through a line of credit, any unused portion will actually grow over time, yielding an ultimately larger total loan amount.
Even if the borrower withdraws the same $1,695.71 per month as he would receive through a tenure payment, he’ll benefit from the growth that’s occurring on the remainder of his line of credit.
This could be an important distinction, because while that sum may seem adequate at the time, it’s possible that this borrower’s cost of living will increase over time.
With the tenure option, that monthly sum will stay the same. With a line of credit, the borrower will have more flexibility to withdraw a higher sum in any given month, along with increased borrowing ability down the road.
Another way to utilize the line of credit growth option is to take out a reverse mortgage as soon as you’re eligible, at age 62, and then let it sit—and grow—for 10 years.
For a 62-year-old borrower who qualifies for a $236,000 reverse mortgage loan, those proceeds will nearly double to $441,000 in ten years in a line of credit.
Then, at age 72, the borrower could start drawing down that line of credit for retirement, or even convert this to large tenure payment.
While there are some upcoming changes to the federal HECM program, the line of credit growth option is remaining.
Ultimately, the way you choose to access your reverse mortgage loan depends on your particular situation and financial needs.
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