Government-insured reverse mortgages offer borrowers multiple ways to receive payouts, but only one option can increase available funds over time. The line of credit provides funds up to the established withdrawal limit, but any unused portion of their credit line grows at the "line of credit growth rate," enabling borrowers to access additional funds over time.
Reverse Mortgage Credit Line a Flexible Option
HUD-insured reverse mortgage loans (called home equity conversion mortgages or HECMs), allow borrowers to withdraw a lump sum at closing, receive monthly payouts for the life of the loan or for a limited time period selected by the borrower(s) or take out a reverse mortgage credit line that can be drawn on as needed. HECM borrowers can also a credit line with other options.
Unused HECM Line of Credit Grows
HECM borrowers who choose a line of credit can have access to more credit over time as their line of credit grows. This rate of increase is equal to their HECM interest rate plus 0.50 percent. Adjustable-rate HECMs earn according to the mortgage rate in place during any given month plus 0.50 percent. Growth rate additions are posted to a borrowers' reverse mortgage credit line.
If, for example, you have a $200,000 line of credit with $100,000 unused, and a five percent fixed interest rate. In 12 months, your line of credit would increase to $105,500 ($100,000 * 105.5 percent). The longer your HECM reverse mortgage credit line remains untouched, the larger it can grow.
Borrowers who don't need to rely on monthly payments from their HECM loans may find the line of credit works best for them. For example, homeowners can benefit from a HECM loan by paying off their current mortgage balance with a lump sum and setting up a line of credit for the remaining available equity.
Reverse Mortgage Terms and Costs Vary
While most reverse mortgages are backed by HUD and their fees are limited, the government does not set interest rates. In addition, while HUD allows lenders to charge an origination fee and a servicing fee, the only thing lenders are required to charge is mortgage insurance premiums. So it pays to shop for the loan with the lowest cost and the best terms.
In addition, there are other reverse mortgages called "private," "proprietary," or "jumbo" reverse loans. They can be less restrictive (for example, most have higher loan amount limits), but generally cost more.
Whichever kind of reverse mortgage you're interested in, it pays to shop and compare mortgage quotes for HECM and non-HECM reverse mortgages.