Grow Retirement With The HECM Growing Line of Credit
Whether you need to pay off an existing mortgage or you are very wealthy and have diverse retirement portfolio sources, this feature of the reverse mortgage is for everyone who manages their finances for maximum benefit.
HECM Line of Credit Basics
Before we illustrate the power behind this feature, here are some things to know:
- Your HECM line of credit can be used for most anything you want
- You do not need to make payments on any amount you receive
- The line of credit grows monthly whether rates go up or down or the economy crashes
- There are no tax consequences on the growth in your line
- You can choose to pay the balance down if you choose to
- You recoup closing costs through the value of the line after just one year
- Interest and MIP accrues only on the existing outstanding balance
- Market rate increases can actually be to your advantage
- You must continue paying your homeowners insurance and property taxes
Let’s illustrate how the line grows each year:
Meet Hank and Sarah. Both of them are now 62 and eligible to consider a reverse mortgage. They own their home with no mortgage and its value is $350,000. They want to establish a line of credit that grows. Based on their age, home value, residual income situation, and rates, today they are approved for a maximum Initial Principal Limit (line) of $183,400.
They have no current need for the line nor do they intend to use it for several years.
They plan to start with the minimum required balance of $100 to keep the line active, and to pay the closing costs with cash from a low-interest-bearing savings account. Rates that day happen to be 3.233% on a HECM CAP 5 and the current FHA MIP on outstanding balances is 1.25%. Hank believes their home value will grow at only 2%.
What could their line look like every five years if the average rate held at 4.75% and MIP at 1.25%?
Understanding This Illustration
Each year the available Line of Credit increases at the same rate as the loan interest rate plus the MIP rate. This also means that if rates climb as high as 5%, they will get a return equal to 3.233%+5.000%+1.25%, or 9.483%. The growth is tax-free and works to their advantage.
In this case if they do not need to use any funds until they are 76 years old, they could have $449,850 available to draw for anything they want, without paying anything except their homeowners insurance and taxes. They could buy a vacation home. They could help a grandson in college. They could offer down payment gifts to all their children for their homes. They could prolong Social Security Benefits. The list goes on and on and is limited only to the responsible needs they have for the rest of their lives.
All projections are based on hypothetical projections using standard amortization schedules and example rates and for illustrative purposes only.
Line vs. Home Value
Suppose we go through another great recession of property value. Look at year 15. Their line of credit is $449,850, almost equal to 100% of the value of the home. Suppose values drop by 10%. Their home is now worth just $430,000. However, their available line of credit remains at $449,850. This means they still have the asset value and buying power of a strong economy. Not only that, if they still don't use it, it continues to grow while property values are stagnating.
Using the Line. Moving Out. Repaying the Loan
Now suppose they are 85 years old and the home value is $562,953. Their line of credit is $770,908. They decide they want to downsize to a retirement community with onsite assisted living, and to set the remaining cash into a trust fund to fund their remaining years. They take the entire $770,908, buy a smaller home for $250,000, and set the remaining $520,000 in a savings account. What happens now?
If you ever wonder about the the purpose of Mortgage Insurance Premiums (MIP), here’s your best reason to appreciate it. The MIP paid by you and thousands of others has just insured any losses on your home. This protects the fund and YOU. The balance owed is the lesser of 95% of the value of the home or the loan balance. This means that if the home appraises for $500,000 when they leave, they will only owe $500,000, even though they withdrew $770,908. The proceeds from the sale of the home is all that is required to pay the loan in full.
Not For Everyone
Every client has a different story, different goals, and different thresholds. This still isn't for everyone. Take time to read I Have No Debt, No Mortgage, and Adaquate Resources. Why Would I Get a Reverse Mortgage LOC? on our Frequently Asked Questions page.
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