The HECM reverse mortgage line of credit is a great financial tool for many seniors. If you owe little to nothing on your home, the HECM line of credit can turn a portion of your home’s value into a tax-free retirement “account” that will grow larger over time. Let me show you how with a HECM line of credit example.
But before we do that, let’s first cover a few basics about what a HECM is and how it works. There is a lot of misinformation out there about the program.
What is a HECM?
The home equity conversion mortgage, or HECM (often pronounced heck-um by industry professionals) is the most popular reverse mortgage in America today.
The FHA-insured HECM enables seniors 62 or older to convert a portion of their home’s value into tax-free cash. No mortgage payments are required as long as at least one borrower is living in the home and paying the required property charges.
You always remain the owner of the home and you’re free to leave it to your heirs, who will inherit any equity remaining in the home.
Seniors commonly use HECM proceeds to get rid of existing mortgage or other debt payments, finance home improvements, or supplement income and retirement assets.
The HECM is a non-recourse loan, which means the most that will ever have to be repaid is the value of the home. If the home isn’t worth enough to settle the entire balance, FHA will cover the shortage.
Proceeds can be received in the form of term or tenure payments, lump sum, or line of credit. It’s the line of credit that I want to focus on here.
A HECM line of credit example
The reverse mortgage line of credit is very similar to a traditional home equity line of credit, or HELOC, except that no mortgage payments are required. Even better, the line of credit automatically grows, giving you access to more equity over time.
To see how this works, let’s check out a HECM line of credit example. Let’s assume you qualify for an initial credit line amount of $75,000 with an annual growth rate of 5%. As you can see in Figure 1, your line of credit will grow to over $95,000 after just five years. After ten years, it will be worth over $122,000!
Because the growth rate applies to the available line of credit, growth compounds on growth. This means that the available credit can really add up over time.
The growth rate will also keep up with prevailing interest rates. If interest rates creep up in the future, the line of credit growth rate will as well. It might sound crazy, but higher interest rates could be very beneficial for you!
There’s no limit on how much the line of credit can grow. Theoretically, it could even grow larger than the value of your home! And don’t forget: the HECM is non-recourse. You or your heirs are not on the hook for the shortage if your home isn’t worth enough to pay off the entire balance.
Pretty cool, eh?
Let’s look at another HECM line of credit example. This time, let’s assume that your line of credit starts off at $150,000 and the growth rate is 5%.
As you can see in Figure 2, the growth really adds up quickly. After just five years, your available credit will be over $191,000. After ten years, it’s more than a whopping $244,000!
If you got the line of credit at age 62, you’d have nearly $400,000 available by your 82nd birthday. That’s $400,000 worth of added financial security at a time in life when in-home care or other medical expenses can be a huge financial burden.
More financial security in retirement
The reverse mortgage line of credit can be a great way to supplement your retirement assets. It effectively turns a portion of your home’s value into a liquid and tax-free retirement “account” that automatically grows and compounds larger over time.
You never know what new expense life can throw at you, right? Whether it’s medical bills or home repairs, you want to have as plenty of financial resources available. The HECM line of credit can be a great tool to help you live more financially secure in retirement.