Why Would I Want a Reverse Mortgage When I Don’t Need Money Now?
Many people ask me this question and the answer takes a little explaining.
First, if you don’t need money now but you think you may in five or twenty years from now, then allow me to demonstrate the credit line growth rate of the FHA reverse mortgage credit line option.
FHA Reverse Mortgage Credit Line (HECM)
The FHA Home Equity Conversion Mortgage (HECM) line of credit is usually the best choice if the borrower has no mortgage or a small mortgage balance at the time of application. The borrower then choses how they want to draw on the credit line. Here are a few examples:
- Monthly disbursements for life, or tenure.
- Monthly disbursements for a fixed period, or term.
- Small monthly disbursement for a fixed period and credit line, or modified term.
- Standby line of credit for future use.
The FHA insured reverse mortgage (HECM) credit line will be available for as long if one borrower is living in the home as their primary residence. The home equity line of credit (HELOC) at your bank or credit union is typically limits the draw period to ten years. After that, you must reapply and qualify for the HELOC. This can be difficult for anyone when their only source of income is social security.
Credit Line Growth Rate
The best feature, and often unknown, is the growth rate on the HECM line of credit. Any unused portion of your credit line will increase every month at the same rate as the current interest rate plus mortgage insurance (MI). For example: if the index rate and margin equal 3.56% you would add the .50% MI and get 4.06% (growth rate).
Here is a case study of a 72-year-old and a 3.80% growth rate:
- Home Value: $650,000
- Reverse Mortgage Qualified: $372,500
- Pay off existing Mortgage Balance: $175,000
- Remaining Available Credit Line: $197,500
If the borrower takes no additional draws, the remaining $197,500 will increase to:
- 5 years / age 77 = $218,929*
- 10 years / age 82 = $264,660*
- 15 years / age 87 = $319,944*
How about a scenario for a 62-year-old with no mortgage and 4.56% growth rate?
- Home Value: $650,000
- Reverse Mortgage Qualified: $289,802
Again, this borrower takes no additional draws, the remaining $289,900 will increase to:
- 10 years / age 72 = $452,515*
- 20 years / age 82 = $706,584*
- 25 years / age 86 = $882,936*
*Assuming the one-year LIBOR does not increase or decrease over these years.
Do you understand the high costs of long-term care insurance? Imagine if after paying all those premiums for all those years and never needing it? Now, you can see that the HECM LOC growth potential could pay for medical expenses without having to pay costly premiums for all those years.
Now imagine other possibilities where the growing credit could cover for this borrower:
- Home improvements and repairs
- In-home care / Long term care
- Medicare Part B and Part D
- Travel / vacation
- Or any unforeseen future expenses and setbacks
Remember, that the growth rate is tied to the index rate. Therefore, if the index increases by a quarter of a percent, the growth rate will also increase by the same amount. So, for once in your life you are celebrating when your mortgage interest rates go up!
Recap
- Disbursements are Lump sum or credit line
- FHA HECM line of credit growth rate
- Funds available on remaining credit for you to use at your discretion