One of my favorite features of the reverse mortgage, and by far the most popular option for borrowers, is the line of credit, or LOC. It provides borrowers the most flexibility in the use of their home equity, along with the most control.
Throughout the site you will see how and why you may want to implement a reverse mortgage line of credit. For now, I will just focus on the main benefits.
Interest and Mortgage Insurance Accumulates Only on Borrowed Funds
If you establish a line of credit, you do not pay interest or mortgage insurance on the available funds. This is because it is credit that is available that you have not used yet. Only after you use funds from the line of credit will any interest or mortgage insurance accumulate on the balance. Do keep in mind that there may be an initial loan balance if you lump your closing costs into the loan, or any liens were paid off through the reverse mortgage.
A Reverse Mortgage Line of Credit Creates Liquidity
The biggest problem with home equity is that it is not liquid. The only way you can gain access to a home’s equity is to either sell your home or borrow against it. Using a reverse mortgage, you create liquidity in the home. Requested funds will be wired to your account within 5 business days.
It’s a Revolving Source of Funds
If you choose to make a mortgage payment, the amount of payment you make becomes available in the line of credit. To keep the line of credit open, you cannot pay off the loan completely. You are required to maintain a small balance. This varies for each servicing company. It could be as little as $1, or it could be $100. It is best to contact your servicer and find out what their requirements are before sending in a payment that drastically reduces your loan balance.
It is Secure
As long as you are living in the home and paying your taxes, insurance and other housing expenses, maintaining your home and following the terms of your mortgage agreement, then you are guaranteed access to any available funds. This is true regardless of your loan balance or current value of your home. The exceptions to this would be if your home is in a declared disaster area or the home has been in a fire. Funds can be frozen until there is proof the home was not damaged or repairs have been made. Funds can be released to make needed repairs to the home.
The Unused Portion of the Line of Credit Grows in Availability
This feature of the line of credit is amazing. It offers one of the most tantalizing reasons to get a reverse mortgage. It is also one of the biggest arguments as to why senior homeowners should get a reverse mortgage even if they don’t necessarily need one.
The unused portion of the line of credit grows at the current interest rate plus .5%. Interest rates are determined by the margin and the index. For example, if the margin was 2.75% and the index was 1.5%, the interest rate would be 4.25%.
4.25% + .5% = 4.75% growth rate on the line of credit
It gets even better. Even if the index dropped to 0% and, using the example above, you will still get a 3.25% growth rate on the line of credit.
2.75% + .5% = 3.25% growth
rate on the line of credit
Growth in The Line of Credit
$300,000 Home Owned Free and Clear – 5.032% Initial Growth Rate – Line of Credit Taken Out at 62 – Assuming No Draws from Credit Line *
|Age||Line of Credit Available|
*For illustrative purposes only. Line of credit availability based on youngest borrower’s age, home value and current interest rates. Future growth rates are determined by future changes of LIBOR index rates, which could move up or down. Example above assumes no change in the initial growth rate. Initial interest rate of 4.532%, expected rate of 4.99%, principal limit $123,000, remaining principal limit after fees $109,543.
Unlike a traditional asset that grow in value, you do not pay taxes on the growth of the line of credit when you use the proceeds.