In a second series on reverse mortgage specifics, the Mortgage Professor (a.k.a. Jack Guttentag) targets the question of age as it relates to credit line borrowers of reverse mortgages. The conclusion: Age matters.
While using a reverse mortgage to finance investments is a bad idea except in a few specific cases, he writes. But using the reverse mortgage, taken as a line of credit, to meet unexpected expenses could make a real difference. For those who trust themselves to draw on the line of credit responsibly, he says, his advice is: Don’t wait.
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.
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 percent annual mortgage insurance premium. At current rates, the line will grow about 5 percent 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 percent a year. When interest rates rise, the growth rate will automatically increase.
If the senior waits instead, the initial line he can draw will rise over time because he is getting older and his house value may be rising. However, growing older increases his line by only about 1 percent a year, which means that the senior’s house value has to rise by 4 percent a year to match the growth in an unused credit line. But few houses today are appreciating at 4 percent 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.
Written by Elizabeth Ecker