Blog

10 Benefits of A HECM Reverse Mortgage Line of Credit

Financial Columnist Jane Bryant Quinn wrote in a 2013 article  “A great reverse mortgage idea: Take a credit line now” that:

I’ve got a financial proposal that is probably going to surprise you. Take out a reverse mortgage at age 62, even though you don’t need the money. In fact, take it especially if you don’t need the money…

This was a surprise to many of Jane’s readers. For years she has talked about reverse mortgages but advised readers to “save it for later.” Yet financial researchers and leaders have been advising “take it now” since 2011. Reverse Mortgage, used in a conservative, coordinated retirement plan, is indeed an important strategic tool.

Quinn goes on to say “there’s a valuable new opportunity at hand, for borrowers who don’t need extra money now. You borrow as early as age 62 and take the mortgage in the form of a credit line instead of all-cash. You can borrow against the credit line at any time, but you don’t have to take the money now. More important, this credit line grows every year – greatly increasing your borrowing power in the future.”

Mortgage Professor Dr. Jack Guttentag expands on that:

The magic in a HECM credit line is that YOUR BORROWING POWER ISN’T FIXED!  Your available credit rises every year, by roughly the mortgage interest rate. For example, take a credit line of $142,000. If mortgage rates plus insurance stay at today’s 3.72 percent , your borrowing power will rise to $205,000  10 years from now (assuming you’ve taken no money out).

 

What is a HECM Line of Credit?

A Home Equity Conversion Mortgage (HECM) is a federally insured loan for people over the age of 62 that allows you to borrow from equity in you home without the monthly payments of a regular loan.

The amount of benefit is based on:

    1. The Age of the Youngest Borrower (The older you are the more money you can borrow)
    2. The Value of the Home (up to the Federal Lending limit – as of today it is $625,500)
    3. The Interest Rate associated with the program selected (called the “expected” rate)

The mortgage doesn’t come due until you leave your home permanently. When the house is finally sold, the proceeds first repay what you borrowed plus the accumulated interest. The remaining money goes to you or your heirs. If the house sells for less than the loan amount, the Federal Housing Administration, which insures HECMs, covers the lender’s loss. 

For a quick look at how much you might be able to borrow with a HECM, check the calculator at reversemortgage.org

So Why Do it Now?

Lower Interest Rates Means More Borrowing Power

  • As interest rates rise (ask the average Bank CD holder if  they think or want interest rates to rise) the amount of borrowing power goes down.

Question: Don, if I wait until I’m older, won’t I get more money? Won’t my home  be worth more as well?

  • Not necessarily.

HECM LOC GrowthExample: Suppose your client has a mortgage-free house worth $300,000. At this writing, a 62-year-old could get a $142,593 credit line on a HECM with at an interest rate of 3.72 percent (including the mortgage insurance premium). If rates rise by 3 percentage points, you could borrow only around $85,000

The low interest-rate environment of today offsets whatever advantage there is to waiting.  And there are other advantages as well.

HECM Lines of Credit have a Build-in Cost-of-Living Adjustment

  • The unused portion of the line of credit grows at the same rate as the cost of borrowing. A standard line of credit (HELCO) does not.

10 Benefits of the HECM line of Credit

    1. Access to Equity : No Impact on Cash Flow.  No monthly payments ease cash flow for retirees
    2. Rely on a HECM Line of Credit that Cannot be Cancelled, Frozen, or Reduced by the Bank
    3. No Standard Underwriting Guidelines.  There are no Minimum Credit Score Requirements, no Standard Income Verification’s (though in 2014 it is predicted that the FHA will require that borrowers have enough income to meet basic living requirements i.e. Property Taxes and Home Owners Insurance).
    4. Standby Emergency Line of Credit that provides  Liquidity When Needed.
    5. Guilt Free Enjoyment. Buy the Car. Go on the Cruise. Visit the Grand kids without any worry.
    6. Supplement and/or Avoid Portfolio Draws During a Bear Market – Scheduled monthly draws supplement portfolio draws and provide greater spending success.

    7. Be Your Own Family Bank. Sometimes a situation arises in a family where traditional financial methods are unavailable or insufficient.  Once I had a client whose son had suffered a terrible set back. He needed to move his dental practice, but was unable to do so through conventional means.  His mom was able to provide short-term financing.

    8. Self Funding for Health Care – Keep insurance policies in effect.
    9. Equity Insurance. Insure access to home equity throughout retirement.  Avoid “under spending “ for retirement.
    10. Defer  Social Security Benefits until age 70 without losing income during deferral period.

CreditLineGrowth-229k start

heloc vs hecm

 

DonG-ShortBio-2

Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

President and Chief Conversation Starter at HECM Advisors Group/Institute
Don Graves, RICP® is a Retirement Income Certified Professional and one of the Nation’s Leading Educators on the Emerging Role of Reverse Mortgages in Retirement Income Planning. He is president and founder of the HECM Institute for Housing Wealth Studies and an adjunct professor of Retirement Income at The American College of Financial Services. He has helped tens of thousands of Advisors as well as more than 3,000 personal clients since the year 2000
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

Categories: Advisors, Common Usages, Financial, Financial Planning, Strategic Usage, Topics

Tags: ,

Leave a Comment