I find one of the most intriguing aspects of the reverse mortgage loan is the line of credit option and it’s growth feature. If a homeowner has a HECM Adjustable Rate Loan, either Standard or Saver, and they choose the line of credit option there are some cool features that could come in very handy as the homeowner ages, one of which is the “growth rate”.
So, What is this “Growth Rate”? Depending on the type of reverse mortgage you received, you may experience “loan growth” on your reverse mortgage. This “growth” is simply an increase in the amount of money that you are eligible to withdraw if you elected to have a line of credit* as part of your payment plan option. Because changing interest rates affect the level of growth, it is impossible to know what level of growth your reverse mortgage may or may not have over the life of your loan.
Not only that, but if a borrower were to make prepayments on his reverse mortgage, those funds would also increase the amount of available credit. Due to it’s nature as a “open-ended” loan, funds that are prepaid to the the lender increase the amount of available credit that can be withdrawn. “A Borrower may specify whether a prepayment is to be credited to that portion of the principal balance representing monthly payments or the line of credit. If Borrower does not designate which portion of the principal balance is to be prepaid, Lender shall apply any partial prepayments to an existing line of credit or create a new line of credit. Any partial payments will be made available to Borrower by increasing the amount of Borrower’s monthly payments and/or increasing the amount available to Borrower for Loan Advances under a line of credit.”
I see a situation where a youngster of 62 could take a reverse mortgage, payoff his current loan, then make payments to his reverse building a line of credit up over time that when he is older, say 82, he could begin to take the funds back out either monthly or as needed. Another option for this borrower would be to take his monthly savings (no more house payment money) and invest it into building up his savings, retirement account or other financial tool to better secure his future or maybe to defer taking his Social Security for awhile increasing that distribution when it comes.
What do you think?
I would love feedback on my ideas above, especially from those of you with financial planning backgrounds!
As always, the thoughts, and opinions expressed in my post here are my own and do not necessarily reflect those of my employer.
*Plan Options
- Line of Credit
- Lump Sum (All Cash)
- Tenure - Monthly payments as long as you live in the home.
- Term - Monthly payments for a specified period of time.
- Modified - Combination of any or all of the above.
Deborah Nance
Your Local Southern California Reverse Mortgage Professional
