When most seniors consider “aging in place” with a reverse mortgage, they assume that taking a lump sum payment at closing is their only option. One of the biggest fears that they express is the management of these funds. Reverse mortgages, also known as Home Equity Conversion Mortgages, are structured to allow the borrower to receive funds in a variety of ways. HECMs contain either a fixed or variable rate feature as is the case with standard forward mortgages. All of the options such as term or tenure payment are only available when the program selected contains a variable rate feature such as the HECM Standard Libor or Saver Libor. Lump sum payments are the only option available on the HECM Saver Fixed program.
Taking advantage of the line of credit option is the least understood option yet it grants the borrower the greatest flexibility in receiving their funds. If the borrower needs funds for the future, (say for college tuition), a line of credit works particularly well in that no interest accrues until the funds are accessed. Additionally, the available (unused) line of credit actually grows on a monthly compounded basis. An interesting investment strategy that is rapidly gaining in popularity is establishing a HECM line of credit at the earliest possible qualification date. The line of credit is then left unused for several years. It actually compounds at the interest rate that would be charged if the funds had been accessed plus 1.25%. Using today’s prevailing rates, a senior at age 62 who takes out a line of credit for $120,000 and leaves it untouched for 20 years could reasonably expect that line of credit to grow to over $1.1 million.
Seniors need a full analysis of all options before committing to any mortgage program. Strategies for future wealth such as these must be carefully explained by consultants who place their client’s needs above all else. We recommend that anyone approaching their 62nd birthday contact us for a free HECM options analysis.