February 18, 2019 by HECM Pro
The HECM reverse mortgage line of credit is simply fantastic. It’s a shame that so many seniors and their advisors and family members remain unaware of its potential benefits.
If you’re at least 62, the HECM line of credit can substantially enhance your lifestyle and financial security in retirement.
We’re living longer than ever today. It’s essential to have as many financial resources in retirement as possible.
What if you’re retired for 25 years?
A senior retiring today at 65 could live another 25 years. How many more roofs and air conditioners will you need to buy for your house over that time? What if you need to replace your car? How about medical expenses?
And let’s not forget about inflation, which constantly eats away the purchasing power of your dollars. How much more expensive will life be in the decades ahead?
If you lack the savings to comfortably survive potentially decades of inflation, home repairs, financial emergencies, and medical bills, then a reverse mortgage could be an ideal way to enhance and protect your retirement lifestyle and financial security.
I want to show you how the HECM reverse mortgage line of credit can add another resource to the retirement funding picture. No longer do you have to retire on just savings, Social Security, and pensions. We can add another resource to the retirement funding picture: home equity.
Before we dig into how, let’s cover a few basics. There is a lot of misinformation floating around about the HECM reverse mortgage.
What is a HECM?
The home equity conversion mortgage, or HECM (often pronounced heck-um) is the most popular reverse mortgage in America.
The HECM gives seniors 62 or older access to a portion of their home’s value without selling the home or taking on a mortgage payment.
Monthly mortgage payments are not required as long as at least one borrower is living in the home and paying the required property charges (property taxes, homeowner’s insurance, HOA dues, etc.).
You always remain the owner of the home and you’re free to leave it to your heirs, who can inherit any equity remaining in the home.
The HECM is non-recourse, 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.
Why the Reverse Mortgage Line of Credit is Awesome
When you’re retired, you need to have as many financial options as possible because your capacity to earn is limited (or nonexistent).
The largest asset most seniors own is their home. According to 2010 US census data, the typical American’s net worth at age 65 is $194,226. About 25% of that total is liquid assets like savings, IRAs, 401(k)s, etc. The other 75% is home equity.
Now think about your home’s equity for a minute. How does it make your life better? Whether it’s $1,000 or $1,000,000, what real impact does it have on your daily lifestyle? Probably not much, right?
If you don’t plan on selling your home, it really doesn’t matter how much equity you have. It’s just a number on paper.
Having said that, there’s nothing wrong with having a lot of equity in your home. It’s very commendable to pay off your home and no longer have a mortgage payment. In a sense, home equity is a forced savings account that you contribute to with every mortgage payment you make.
The problem with home equity is that it’s an unusable savings account. It can’t normally be converted to cash without either selling the home or taking on a mortgage payment. The reverse mortgage line of credit is designed to solve this problem.
The Home Equity Retirement “Account” That Grows
The reverse mortgage line of credit is very similar to a traditional home equity line of credit (HELOC), except that no mortgage payment is required. You don’t have to pay back any of the money you borrow as long as you meet your program obligations.
Even better, the line of credit automatically grows, giving you access to more equity over time.
To see how this works, let’s look at an 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 in absolute dollar terms can really pile up over time.
The growth rate will also keep up with prevailing interest rates. If rates rise in the future, the line of credit will grow faster.
There’s no limit on how much the reverse mortgage line of credit can grow. Theoretically, it could even outgrow the value of your home! And because the HECM is non-recourse, you’re not on the hook for the shortage if your home isn’t worth enough to settle the entire balance.
Let’s look at another example. Let’s assume this time that your reverse mortgage 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 quick. After just five years, your available credit will be over $191,000. After ten years, it’s more than a whopping $244,000!
If this was your line of credit and you had set it up at age 62, you’d have just shy of $400,000 available tax-free by your 82nd birthday (assuming you didn’t touch it). 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 for Retirement
The reverse mortgage line of credit can be a fantastic way to add substantially to your available liquid retirement assets. The line of credit effectively turns a large portion of your home’s equity into a liquid and tax-free retirement account that automatically grows and compounds larger over time.
No longer does your home’s equity have to be just a nice looking number on paper with no real impact on your daily life! No longer is it doomed to remain a financial resource accessible only by selling your home or taking on a mortgage payment.
If you’re retired and owe little to nothing on your home, the reverse mortgage line of credit could be a fantastic way to enhance your financial security in retirement. ‘Ol Murphy is alive and well, right? You never know what new expense life can throw at you, whether it’s medical bills, home improvements, or a rising cost of living.
If you want to live financially secure in retirement, it’s essential that you have as many financial resources as possible. The reverse mortgage line of credit can be a key part of making that happen,
Have a great week!