HECM Line of Credit: How to Get the Most Out of Your Reverse Mortgage

A Home Equity Conversion Mortgage (HECM) Line of Credit can be a great way to get the most out of your reverse mortgage. It allows you to borrow against the equity of your home at any time, for any reason. (e.g., personal finance, vacation, buying furniture, etc.) This can be an excellent option for those who need access to cash quickly and only take the amount of money that is needed.

In this blog post, we will discuss how a HECM Line of Credit works and how you can make the most out of it!

What is a Reverse Mortgage Line of Credit?

A Reverse Mortgage Line of Credit is a very popular feature of reverse mortgage loans. Once you obtain a reverse mortgage and choose the payment plan that best suits your needs (in this case we are going to assume you took out the Reverse Mortgage line of Credit), it will allow you to access cash at any time. What makes this type of line of credit unique is how it works and the safety features built into it.

As of 2023, the HECM line of credit is the ONLY line of credit in the U.S. that lets your money grow over time. Any unused portion of the line of credit will grow year after year, giving you more access to your home equity and helping you meet any hardships the U.S. economy may bring.

This gives the term “turning your home into a bank” an entirely new meaning. The best part is that the HECM line of credit is not subject to a maturity date as is the case with conventional Home Equity Lines of Credit, where after some time, borrowers are required to make both interest and principal payments. For many people, this is what we call a “payment shock”. A HECM line of credit does not require you to make monthly payments and the money you used to pay for your expenses is not due until you pass away or sell the house.

Let’s review the HECM Line of Credit’s features:

• No monthly payments are required. Just pay your property taxes and Homeowner’s Insurance (And HOA dues if applicable)
• A HECM Line of Credit has a growth feature not available anywhere else.
• Only the amount of money that was used has to be paid back when the loan becomes due.
• The only maturity date is when you pass away or sell the house.
• Some of our proprietary products also offer a Reverse Mortgage Line of Credit.
• There is no need to re-qualify again each year.
• Since the HECM Reverse Mortgage is insured by the FHA, your line of credit can’t be frozen or canceled due to a financial crisis (like the one we saw in 2008). However, if you fall behind on your property taxes and homeowners’ insurance, then the lender can use the money that is available to cover these mandatory obligations.
• The extra money you get from the growth of the line of credit is not taxable because the IRS does not consider it as income. This is why it is a great financial planning tool.

A reverse mortgage line of credit is also a versatile instrument that may be used in a variety of ways. You can, for example, use it to:

• Pay for unexpected expenses
• Make home improvements
• supplement your income in retirement
• Take a vacation

This can be a great option if you need cash for an unexpected expense or if you want to have access to extra money in retirement.

What is a Reverse Mortgage?

A reverse mortgage is a type of loan for people over the age of 62 (And 55 for Proprietary Reverse Mortgages) that allows you to borrow against the equity in your home without having to make monthly mortgage payments. The amount of money you can borrow depends on the value of your home, your age, and the interest rate.

With a reverse mortgage, you can choose between different payment plans such as monthly payments to you, a growing line of credit, a lump sum distribution, or a combination of all three payment plans, and the only obligations you have are to continue paying your property taxes and homeowners’ insurance (And HOA dues if applicable). You get to retain title to the home and pass it on to your heirs either through a trust or a will. All they need to do is pay back what they borrowed by either refinancing the loan or selling the house.

As a means of accessing funds, reverse mortgage lines of credit remained the most popular option for homeowners in 2021. A reverse mortgage is seen as a good choice about 66% of the time by borrowers, according to a recent article by AARP.

Do You Qualify for a Reverse Mortgage?

To be eligible for a Home Equity Conversion Mortgage (HECM) reverse mortgage, you must meet the following requirements:

• Be at least 62 years old (or 55 for the
• Own your residence outright or retain a low mortgage remainder that can be paid off at closing with proceeds from the HECM loan
• Occupy the property as your primary residence
• Complete a counseling session given by a HUD-approved HECM counselor
• Have the financial resources to pay ongoing property charges such as taxes and insurance.

Acceptable property types for a HECM include:

• Single-family homes
• Two-to-four-unit owner-occupied dwellings or condos
• Manufactured homes that meet FHA (Federal Housing Administration) requirements
• Townhomes

When You Get a Reverse Mortgage, Do You Have to Get a Line of Credit?

No. A reverse mortgage line of credit is one option for accessing funds from a HECM. You can also receive the funds in the form of a lump sum, fixed monthly mortgage payments, or a combination of the two. The payment options and how much money you can get depend on several factors, including:

• The youngest borrower’s or qualified non-borrowing spouse’s age
• Currently expected interest rates
• Whichever is less, the appraised value or the current maximum lending limit. For 2023 that lending limit is $1,089,300. For our proprietary loans, we can go up to $4,000,000
• How much is owed on the property
• Your home must also meet FHA’s minimum property standards, and an appraisal will be required.

Which is better: a home equity line of credit or a reverse mortgage?

The answer to this question depends on your unique financial situation. However, both options offer homeowners a way to access the equity in their homes.

You can borrow up to your approved credit limit as needed with a home equity line of credit (HELOC). As such, the HELOC features are more similar to those of a credit card, and the loan is secured by your home. As a result, the principal balance must be repaid eventually. When you take out a traditional home equity line of credit, you have to pay interest on the loan balance and when it matures, you must pay interest and principal payments which can lead to a payment shock.

Homeowners who take out a home equity line of credit can access loan proceeds according to their needs during a specified period of time, sometimes referred to as a “draw period.” During the draw period, which usually lasts about ten years, borrowers can make interest-only payments. After the draw period ends, homeowners must repay the outstanding balance of the HELOC in full and/or make principal and interest payments.

In contrast, with a reverse mortgage loan, the loan is repaid when the borrower dies or permanently moves out of the home. If the borrower’s heirs desire to keep the home, they must repay the loan in full by refinancing the reverse mortgage.

Reverse mortgages offer homeowners a better way to access equity, but there are some key differences between reverse mortgages and HELOCs. Borrowers are not required to make monthly payments on a reverse mortgage as long as they dwell in the home. Instead, when the borrower sells or passes away, that’s when the reverse mortgage is paid off by the heirs. As we previously stated, don’t forget that your only obligations are to keep paying your property charges.

So, which is better — a HELOC or a reverse mortgage? The answer depends on your unique financial situation. If you need immediate access to cash and are comfortable making monthly payments, a HELOC may be the better option. A reverse mortgage, maybe a better alternative if you desire another source of cash to supplement your monthly income while having your money grow when it’s not being used. This is something a HELOC will not offer you and a reverse mortgage can.

You should get a reverse mortgage if:

• You are at least 62 years old, own, and have sufficient equity in your home.
• If you have a mortgage balance and want to get rid of those monthly mortgage payments.
• You want to supplement your retirement income.
• You want to have money to create a living trust and make sure you set the guidelines to transfer your estate to your heirs when you pass away.
• You want to stay in your home for the rest of your life.

You should apply for a home equity loan if:

• You’re under 62.
• You have a good income and can afford the monthly payments.
• You need immediate access to cash.

HELOCs and reverse mortgages both offer homeowners a way to access the home’s equity. The best solution for you is determined by your specific financial condition.

Before making any decisions, be sure to speak with a financial advisor to get personalized advice. And remember, both options come with risks — so review the pros and cons carefully before taking either action.

How does a reverse mortgage line of credit grow?

The line of credit on a reverse mortgage grows at the same rate at which the loan accrues interest plus .50%. So if your fully indexed rate is 5.5% then the growth of your line of credit will be 6%! So if your line of credit starts at $250,000 and the growth rate is 6%, that means your monthly growth will be about $1,250 assuming you don’t use the line of credit. This means that in one year, you just gained access to an additional $15,000 from your home equity while not having to pay taxes on this growth. Why? because the IRS does not treat the proceeds from a reverse mortgage as income.

Now you can see why the Reverse Mortgage continues to grow in popularity among older adults while giving them a safety net for the future. This is what I call Financial Peace of Mind.

The Bottom Line

A HECM line of credit can provide a great deal of financial security for seniors in their retirement years. Nevertheless, It’s important to understand all the features and benefits available through a HECM so you can make the most of this type of reverse mortgage.

If you have any questions about how to use your line of credit or want help finding the best lenders in your area, you can schedule a free call with me.