Older adults over the age of 62 who are homeowners sometimes need a substantial amount…
Is a reverse mortgage line of credit worth exploring? Yes, because our homes mean the world to us. We see them as places of comfort and safety, but a home also represents one of the most significant investments a family will make in their lifetime, often with the help of a mortgage.
Once you own property, tools like a reverse mortgage are an excellent way to increase financial liquidity. These loans convert easily into cash, supplementing a monthly income or becoming available for unexpected medical expenses and other bills. Homeowners can also use a reverse mortgage to eliminate required monthly monthly payments* on an existing mortgage, which can mean many more years of disposable income to enjoy.
What Is a Reverse Mortgage Loan?
A reverse mortgage is also known as a home equity conversion mortgage (HECM). It is a loan that enables a homeowner to borrow against the accumulated equity in their owner-occupied home. These government-insured loans become available to homeowners at 62** years of age, and reverse mortgage proceeds are available in different forms—as a reverse mortgage-based line of credit, a lump sum, monthly payments, or a combination of these.
Borrowers can access funds from reverse mortgage loans as:
- a lump sum
- a line of credit
- fixed monthly payment
- or a combination of all three
Unlike with a traditional mortgage, there are no required monthly mortgage payments* on a reverse mortgage. It is possible to take out reverse mortgages on single-family homes, PUDs (planned unit development), 2-4 unit owner-occupied multifamily dwellings, or HUD approved condominiums. It is important to note that a reverse mortgage is strict in its requirement that the property is the borrower’s primary residence.
The loan will be due for repayment in full when the borrower passes away, sells the home, moves out permanently, or fails to meet the loan requirements (such as paying property taxes, insurance, any HOA fees and maintaining the property). In the event of the homeowner’s passing, their heirs become responsible for the repayments and closing costs of the loan.
Types of Reverse Mortgage Loans
Home Equity Conversion Mortgages (HECM)
Common reverse mortgage options include the home equity conversion mortgage (HECM) loans. These federally-insured mortgages are typically a little more expensive but offer great flexibility, financial security, and convenience. There are no restrictions on how the borrower can use the funds, and they can choose to receive the loan proceeds as a lump sum, monthly payments, or a line of credit.
Cases like a modified tenure or term reverse mortgage will mean that borrowers take out their loan as a line of credit and create a fixed monthly payment from the line of credit. The arrangement can allow borrowers a more convenient way to manage their finances and the reverse mortgage. However, the fixed monthly payment may reduce the remaining available line of credit.
Only Federal Housing Administration (FHA)-approved lenders offer home equity conversion mortgage loans, and all borrowers must attend a counseling session with a HUD-approved agency before closing.
Single-Purpose Reverse Mortgages
A less common reverse mortgage loan is a single-purpose loan. The state and local government agency or a nonprofit organization offers these mortgages, which are cheap to take out but full of restrictions. Borrowers can only use the loan proceeds for one purpose, which the application will specify (examples might include the payment of property taxes or short-term home repairs).
Proprietary Reverse Mortgages
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Is a reverse mortgage loan from private lenders, a government agency does not insure proprietary options. The lender may approve a homeowner for more credit, based on the home’s equity. Click here to learn more about the Smartfi Choice.
What Is a Line of Credit?
A line of credit in a reverse mortgage represents one of the most common disbursement options available to borrowers. A reverse mortgage requires taking a line of credit as a revolving facility, guaranteed for life. It allows borrowers to repay loans or balances at any time without penalties.
Homeowners can choose to make regular payments, such as monthly, quarterly, bi-annual, or annual, to their reverse mortgage line of credit. Alternatively, they can defer payments until they sell the home or pass away. The amount of the line of credit may grow over time, as well as accruing interest in the process.
How Does a Reverse Mortgage Line of Credit Work?
A reverse mortgage line of credit works like most traditional lines of credit. It’s an open ended, revolving credit line. You may borrower against it and pay it back as you see fit. The added benefit of a reverse mortgage line of credit is that it doesn’t come with a required minimum monthly payment* like credit cards and HELOCs that carry a balance. Additionally, a FHA-insured reverse mortgage line of credit can never be frozen or canceled due to housing or market conditions. It can provide access to your home’s equity when other financial products and lines of credit cannot. Lastly, the unused portion of the FHA-insured line of credit grows over time, providing you with more access to your home’s equity in the future.
Reverse Mortgage Payment Options
There are four primary reverse mortgage payout options:
- Line of credit
- Structured monthly payments from the line of credit
- Lump-sum payments
- A combination of the above
Reverse Mortgage Line of Credit Growth
A reverse mortgage line of credit (the first option on the list above) enables the borrower to withdraw funds whenever they need a bit of extra cash in their hands. However, the principal limit (or total line of credit) grows with the rate of interest, plus the Annual Mortgage Insurance Premium (MIP).
For illustrative purposes only, let’s review an example where a borrower receives approval for a total reverse mortgage-based line of credit of $200,000 (principal limit) with a total accrual rate of approximately 4.5% (Interest & MIP). Theoretically, over the next five years, the total value of the line of credit could have increased to approximately $250,000. Providing approximately $50,000 more access to the home’s equity from when the line of credit was opened. Ultimately, the borrower has access to more funds in that credit line to use as they see fit.
There are some requirements for obtaining a reverse mortgage line of credit, including that homeowners need to attend a HUD counseling session, provided by a HUD-approved counseling agency. The session aims to help homeowners formulate a plan for financing and maintaining the home over the term of the loan. The program also assists homeowners with foreclosure, if that choice becomes necessary.
Do You Need a Line of Credit with a Reverse Mortgage?
While it may be unnecessary for you to take advantage of a reverse mortgage line of credit, there are certain benefits to borrowing from your home equity in this way, including:
Seniors’ income dries up when they retire, and expenses take a significant chunk of the monthly allocation. With sufficient home equity, a reverse mortgage-based line of credit can supplement this shortfall.
A Home for the Borrower
A reverse mortgage line of credit allows seniors to remain in their homes while enjoying a more comfortable standard of living. They can be close to loved ones and avoid the upfront costs of selling, moving, and resettling.
Continued Home Ownership
Taking a reverse mortgage and opting for a line of credit does not affect the title deed—the borrower still owns their home. If they pass away before paying off the loan, their estate can:
- Keep the home and refinance the reverse mortgage at the current home value
- Retain any equity above the loan balance
- Sell the property to clear the debt
- Settle the loan and return the title to the lender (if the debt exceeds the current value of the property, lenders will work with the FHA for unpaid loan balances).
With a reverse mortgage-based line of credit, borrowers enjoy flexibility on various aspects, including:
- only taking out the amounts they need
- structuring monthly payments
- no monthly repayments required*
The unused portion of the line of credit grows with time, enabling borrowers to access funds above their original arrangement.
A reverse mortgage line of credit may be more cost-effective than a traditional loan when you factor in all the benefits and protections. Borrowers can save a lot on the monthly interest, while the IRS waives taxes on the money received from a reverse mortgage line of credit. The interest on drawings is not deductible until the borrower pays the debts.
No Claims Against a Borrower’s Heirs or Estate
Reverse mortgage lines of credit accrue interest on any unpaid balance. In some cases, the future loan amount may exceed the homes future appraised value, especially if the property values fall. However, these loans fall under the “non-recourse” financing category, so when the borrower passes on, lenders will not be able to claim against the deceased estate’s other assets to settle the remaining reverse mortgage line of credit balance. The home used for a reverse mortgage is the only asset that may be used to repay the debt. Even if the loan amount is higher than the home’s current appraised value.
Do You Qualify for a Reverse Mortgage Line of Credit?
Lenders have certain criteria that borrowers must meet to be eligible for a reverse mortgage-based line of credit. Borrowers must:
- Be the primary homeowner
- Be 62 years or older
- Be free of delinquencies on federal debt
- Possess the financial capability to make payments on HOA dues, homeowner’s insurance, and property taxes
- Reside on the property as their primary residence (meaning consecutively for six months and one day per year)
- Own the home outright or have significant amount of equity or assets
- Attend counseling by a HUD-approved reverse mortgage counselor
- Get an acceptable appraisal for the property
Get Help with Reverse Mortgages and Lines of Credit Today
A reverse mortgage line of credit is a convenient way to borrow against the equity of a home. The available money can go toward paying property taxes and insurance, utility bills, medical bills, and many other expenses. It also does not jeopardize the fact that the borrower still owns and lives in the home that stands as collateral for the loan.
One advantage of a line of credit on reverse mortgages is that the borrower only pays interest on actual borrowings. The money is also available at the homeowner’s convenience, providing flexibility and the potential to reduce cost commitments.
Would you like to know more about qualifying for a reverse mortgage line of credit? Our friendly and knowledgeable Smartfi Specialists are ready to help answer your questions and find out if a reverse mortgage line of credit is right for you. The Smartfi Home Loans, LLC team combines tailored financial products with experience, honesty, and phenomenal customer service.