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Reverse Mortgage - Using credit line to meet special needs

Using a HECM Credit Line to Meet Unanticipated or Special Occasion Cash Needs

Many seniors have retirement income that covers their basic recurring expenses, but not much more. When an appliance unexpectedly breaks that costs money to fix, or a special occasion arises that costs money to celebrate, they can’t cope. A HECM credit line is an excellent way to meet such contingencies.

A HECM credit line can be drawn on at any time to meet unanticipated expenses, or for special occasions such as a wedding or a trip abroad. Credit lines are available only on adjustable rate HECMs; on fixed-rate HECMs seniors can draw cash only.

A HECM credit line can also be used to offset an income drop resulting from termination of a pension following the death of a co-borrower. Millions of married couples are living partially on pensions paid to one of them, which will stop when that person dies. The drop in income of the surviving spouse could have a major impact on that person’s standard of living – unless it is offset by another source of funds. The earlier the credit line is established, the larger it will be when the need arises.

Seniors selecting the credit line option should have sufficient discipline to avoid drawing on the line impulsively, which could use it up in a short period. Those who don’t trust themselves should select a monthly payment option.

For those who take a credit line, forbearance is rewarded by continual growth in the unused portion of the line at the interest rate on the mortgage plus the FHA’s 1.25% annual mortgage insurance premium. At current rates, the line will grow about 5% a year. Some prudent seniors have adopted the policy of drawing on the growth in the line each year for “luxury” items, leaving the original line intact for emergencies.

In today’s market, I advise seniors to take a credit line ASAP, which is when they reach 62 and become eligible. Their line will then begin growing at about 5% a year. When interest rates rise, the growth rate will automatically increase.

If the senior waits instead, the initial line they can draw will rise over time because they are getting older and their house value may be rising. However, growing older increases their line by only about 1% a year, which means that their house value has to rise by 4% a year to match the growth in an unused credit line. But few houses today are appreciating at 4% a year. For most seniors, HECM borrowing power will increase more rapidly by taking out a credit line as soon as they can -- as opposed to waiting to grow older.