Last month in part one of this series that I discussed the benefits of “Payment Flexibility” with reverse mortgages. For this article, I want to discuss the benefits of the Line of Credit (LOC).
A reverse mortgage is an FHA insured loan specifically designed for homeowners age 62 and above, that allows you to convert a portion of the value of your home into tax free money, without having to sell the home, give up title or obligate yourself to a monthly mortgage payment. Since the home stays in your name, you still must pay the property taxes and homeowners insurance as well as maintain the home.
Reverse mortgages are very heavily regulated loans and one of the items regulated is the amount of money available from a reverse mortgage. The amount of money you can receive is based on three things:
- The age of the youngest spouse
- The value of the home
- The interest rate
In a nutshell, the older you are, the lower the interest rate, and the more the home is worth, the higher the loan amount.
The way this works is not the same as it is with a regular mortgage. If you own your home free and clear and just want $20,000 for some repairs or to pay off some bills, you may qualify for $150,000, but you do not have to take the whole amount. You can take out the $20,000 you need and leave the rest in the line of credit.
A reverse mortgage line of credit works like a typical home equity line of credit, but with some major benefits:
- The LOC grows larger over time
- The line of credit can never be reduced or closed (You must continue to live in the home, pay the property taxes and homeowners, and maintain the home)
- No interest or fees are charged on the unused portion of the LOC
- You never need to requalify to keep the LOC in place
- It can be converted into monthly payments to the homeowner at any time
By getting the reverse mortgage early (as close to age 62 as possible), and leaving as much money as possible in the LOC, you can take advantage of the low rates and high property values, but you also take advantage of the line of credit growth over time.
For example, I’m currently doing a loan for a person who owns his home free and clear and is 70 years old. He’s getting a reverse mortgage for peace of mind in case he ever needs it in the future. He is starting off with a LOC of just over $170,000. If he doesn’t use it, in just five years, the LOC will grow to more than $219,000 and over $282,000 in ten years.
If he decides after ten years that he needs to increase his cash flow, he can convert all or just part of the $282,000 to a monthly income that will be automatically deposited into his bank account on the first business day of every month. That’s pretty good peace of mind knowing you have this option in reserve.
However, if the homeowner decides he needs to move or sell, he can do so at any time and simply pay back only the money he’s used, plus interest and fees. Any remaining equity will go to him. If he were to pass away while the reverse mortgage was in place, the heirs inherit the home. They have six months to pay the loan off. This is typically done with the sale of the home, but they can also refinance the home or use proceeds from the homeowner’s estate. The home, and any remaining equity will go the estate.
I hope these two articles highlight the reasons that it might be a good idea to get a reverse mortgage as early as possible. If you have a situation that you’d like to discuss, please feel free to contact me directly.