Reverse mortgage line of credit

Each month, your reverse mortgage line of credit grows on the amount not drawn, using a rate that combines 0.5% a year with the loan's rate. Under the calculator's default settings, the annual rate is 7.23%. This combines 6.73% as the expected rate with the 0.5% mortgage insurance rate.

A line of credit is available only with an adjustable-rate HECM. When you need funds, you draw from it and pay interest only on the amount taken, while the rest remains available to grow.

How the HECM line of credit grows

Consider a 70-year-old who owns a $450,000 home with no mortgage. After costs, the amount available is $155,200. With no amount drawn, the line grows in this way:

The chart presents that same growth. These three points matter:

• This is borrowing room rather than savings. Its growth does not earn money for you. It increases what you can borrow later.
• The home's value does not determine it. The line continues growing even when prices decline.
• The rate changes. With an adjustable HECM, the growth rate tracks the note rate, so the figures shift when rates change.

Each dollar you draw becomes debt instead of credit and grows at the same rate, but no longer grows as available credit.

The first-year limit

You cannot draw the entire line during the first twelve months. The larger amount determines the limit. This is either 60% of the principal limit, or 10% of the principal limit added to your required payoffs. The Congressional Research Service provides a full explanation of the rule.

• There is no mortgage to pay off. The principal limit for the 70-year-old is $173,700. Sixty percent equals $104,220. Once $18,500 in costs are deducted, $85,720 is available during year one.
• There is a $100,000 mortgage to pay off. The total for the payoff and costs is $118,500. After adding 10% of the principal limit, $17,370 is available during year one.

Once the first year ends, the remaining line becomes available with its accumulated growth.

Reverse mortgage monthly payment options

You can receive the same money through monthly payments instead. For the same 70-year-old, the available amount is $155,200:

The tenure payment continues while you live in the home and meet the loan terms, even if the balance exceeds what the property is worth. Under a term option, payments are larger but stop when the term ends. You may combine these options: choose a smaller monthly payment and retain part of the money in a line of credit.

The calculator provides these estimates. A lender's amounts will vary slightly based on its rate and costs.

A lump sum reverse mortgage

For an all-at-once payment, the fixed-rate HECM gives you the full amount when the loan closes. Someone age 70 with a $450,000 home receives $139,000 after costs at a fixed rate of 7.62%. No line of credit or growth applies, and interest begins on the entire amount immediately.

An adjustable HECM may also provide a lump sum at closing, but only within the first-year limit. The remaining funds remain in the line of credit.

Changing your plan later

Your selected plan does not lock you in. The FTC's guide says you can usually switch your payment option for about $20. One common move is to begin with a credit line, then switch to tenure payments later after that line has grown.

When a credit line makes sense and when it does not

Often, this makes sense

• It can serve as a reserve during a market downturn and help cover health costs or home repairs.
• For keeping savings invested while drawing on the line during poor years.
• Opening it early allows it to grow before you need it.

Often, it does not

• If you need a large amount right away. That limit in the first year may hold you back.
• If you might move within a few years. Regardless, upfront costs are paid.
• If you are likely to use it quickly for spending you could cut.

The line ends when the loan comes due, so heirs cannot use it. The HELOC comparison shows the differences between it and a bank credit line.

Questions people ask

1. How does a reverse mortgage line of credit work?

   You take money as needed, up to the limit. Each month, unused funds grow by 0.5% a year added to the loan's rate. Interest is due only on money you draw.

2. Is a line of credit available with my reverse mortgage?

   Yes, an adjustable-rate HECM provides one. A fixed-rate HECM provides one lump sum at closing and does not include a line of credit.

3. What is the monthly payment for a reverse mortgage?

   The amount depends on your age, home value and rate. For someone who is 70, owns a $450,000 home and has no mortgage, the calculator estimates about $1,050 a month for life. It also estimates about $1,810 a month for 10 years.

4. In a loan, what does tenure mean?

   Under a HECM, the tenure payment has a fixed monthly amount. It lasts while at least one borrower remains in the home and continues to follow the loan terms.

5. What are the pros and cons of a HECM line of credit?

   The line grows without requiring payments, and the lender cannot reduce it while you keep the terms. Every withdrawal adds to a balance, which grows at that same rate. If you never use the line, upfront costs are high.