Inside the Reverse Mortgage Line of Credit

One of the many benefits of a reverse mortgage is that it offers a line of credit option to qualifying borrowers. This line of credit competes with—and in many cases outweighs the benefits of—a traditional home equity line of credit. It serves as one of the several ways that borrowers can access their home equity, with the other options being monthly or regular payments or a lump sum. While it may sound a lot like a home equity line of credit, or “HELOC,” the reverse mortgage actually provides a few features that a typical HELOC does not. Here are a few ways the two loans differ.
Interest payments.
A HELOC often requires payment of interest on an ongoing basis while the interest on a reverse mortgage line of credit does not need to be repaid until the end of the loan. Fees. A HELOC typically requires an annual fee to keep the line of credit open. A reverse mortgage line of credit has upfront fees but does not require fees to keep the credit line open.
A HELOC often has a fixed term, such as a 10-year period. A reverse mortgage line of credit remains as long as the borrower lives in the home and maintains the obligations of the loan. Freezes. Banks that offer HELOCs typically have the ability to freeze the line of credit without warning. With a reverse mortgage line of credit, the credit line cannot be frozen or canceled unless the borrower violates the loan terms, causing the loan to become due and payable.
Loan amount.
When you agree to a HELOC, you agree to tap into a certain percentage of your home equity, which is a fixed amount. A major benefit of a reverse mortgage credit line is its “growth feature.” Reverse mortgage line of credit borrowers can actually access more proceeds over time if they do not tap into their loan right away. The credit line amount grows based on a percentage of the unused funds.
One distinct benefit of a reverse mortgage line of credit is that if it is taken under the Home Equity Conversion Mortgage program regulated by the federal government, it is insured by the Federal Housing Administration.
Who holds the line of credit?
While the Federal Housing Administration provides the insurance for HECM loans, the lender actually holds the funds for the borrower to access. In exchange for the proceeds the borrower can access, the lender holds the home as the loan’s collateral, just like in any mortgage. Homeowners continue to retain the title of their home throughout the course of the loan.
Can the borrower repay the line of credit?
The borrower may make payments toward the line of credit at any time, just as he or she may draw upon the line of credit at any time. Making payments toward a reverse mortgage is one strategy that some borrowers use to keep the loan balance low over the course of the loan. Some financial planners recommend this strategy, keeping the line of credit as an option for cash flow when a borrower’s investments are not performing, or to prevent from having to sell other assets at a loss.
How does the insurance work?
FHA insurance is designed to protect the lender from loss when a borrower defaults, and also to protect the borrower in the event that the lender goes out of business. Borrowers pay an upfront premium as well as an annual premium for this insurance. In return, with an FHA-insured reverse mortgage line of credit borrowers can rest assured that they can continue to access their line of credit at any time under the terms of their loan.
If you would like to learn more about a reverse mortgage line of credit and how it can help your situation, contact a reverse mortgage expert who can provide more information and watch the following video: VIDEO EXPLANATION: Reverse Mortgage Line of Credit Explained | Credit Line Growth