Reverse Mortgages and the Line of Credit Option

Reverse mortgages offer several options for access to the funds from the loan, such as: lump sum, fixed payments over time, or a line of credit.  The line of credit has proven to be a very popular choice over time for borrowers.  While I can’t speak for all of them, there are a few advantages of the line of credit option that I’d like to discuss in detail.

The first benefit of the line of credit payout option is flexibility.  With a lump sum payment, all of the money is disbursed at once.  The fixed payments are a set amount over time.  A line of credit allows the borrower to take out a maximum amount defined by HUD when the loan closes, but then after 12 months, they can take out as much or as little as they’d like.  This means that borrowers can take out the money as needed.  So if there’s a need for the money, it’s there. 

This brings me to the next benefit of the line of credit option - interest.  The fixed rate reverse mortgage option is only available when using the lump sum payment option.  While this can be an excellent choice for those that need all of the money at once - to pay off an existing mortgage or a large healthcare bill - if you are interested in accessing funds as you go, the fixed rate option isn’t for you.  With the line of credit option, interest is only charged on the funds you take.  So if there’s a balance of un-borrowed money, you won’t be charged interest on that un-borrowed amount.  Additionally, the un-borrowed balance grows at the same rate at which the loan accrues interest.  In plain terms, this means that the balance of the un-borrowed funds can increase over time (presuming the borrower takes some of the money and that balance of used funds is accruing interest).

The last benefit of a reverse mortgage line of credit option I want to discuss is relative to a Home Equity Line of Credit (HELOC).  A HELOC is a loan using the equity in your house just like a reverse mortgage.  However, the qualifications for a HELOC don’t include some of the same things as a reverse mortgage like being at least 62 years old.  A senior could achieve some of the same financial goals with a HELOC as a reverse mortgage.  However, there are some distinct advantages to a reverse mortgage line of credit compared to a HELOC.  

A HELOC requires monthly payments to the bank.  If you’ve been reading my other blog posts on reverse mortgages, you know that a reverse mortgage allows the borrower to get paid from the bank, not make payments to the bank.  Also, a HELOC becomes a balloon payment after 10 years, requiring the borrower to re-pay the balance at that time.  A reverse mortgage only becomes due and payable when the borrower moves from the home or passes away.  Next, a the reverse mortgage line of credit features a growth rate benefit that was discussed in this blog post - meaning that the un-borrowed balance will grow at the same rate as interest is accrued on the borrowed amount.  A HELOC will not have this growth feature.  Finally, a reverse mortgage line of credit can never be frozen.  HELOCs can be frozen for a variety of reasons (the lender doesn’t want to offer them anymore for example), but a reverse mortgage includes mortgage insurance as part of the closing costs that prevent this from happening as long as the borrower continues to occupy the home as their primary residence and stays up to date on homeowners insurance and property taxes.  

If you’re considering a reverse mortgage, I hope this helps clarify the line of credit option that is available as a payment option. If you’d like to learn more about a reverse mortgage and the line of credit option, please give the folks at Equity Access Group a call.  They specialize in reverse mortgages and will be able to help give you specifics based on your home and finances.