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Growing Creditlines and Reverse Mortgages

by: AARP | from: AARP | April 2010

The Home Equity Conversion Mortgage (HECM) program gives the most choices in how you can get your cash from a reverse mortgage. You can take all of your loan as:

a single lump sum of cash; or as
a "creditline" account of a specific dollar amount that you control; you decide when to make a cash withdrawal from this account and how much cash to withdraw; or as
a monthly cash advance for a specific period of time, or a monthly advance for as long as you live in your home.

In addition, you can choose any combination of these options, and you can change your choices at any future time.

Loan Amounts

The amount of cash you can get depends on your age, current interest rates, and your home's value. The older you are, the more cash you can get. If there is more than one owner, the age of the youngest owner is the one that counts. The lower interest rates are when the loan closes, the more money you can get. You can also get more money from a lender who charges lower loan fees.

In general, the more your house is worth (its appraised value), the more money you can get. But the value is subject to a limit of $625,500. If your home is worth more than $625,500, you are still eligible for a HECM loan. But the amount of money you can get is based on $625,500, not on your home's actual value. For example, if your home is valued at $700,000, then the amount you can borrow is the same as it would be if your home were valued at $625,500.

The current home value limit of $625,500 went into effect on February 24, 2009, and will remain in effect until December 31, 2009. Congressional action during 2009 could extend this limit into 2010. If Congress doesn’t act on this matter, the limit would most likely revert back to the previous limit, which was $417,000.

The amount of money you can get from a HECM loan also depends on how you want it paid to you: lump sum, creditline, monthly advance, or some combination of these three types of cash advances.

Creditline Growth

Perhaps the most attractive HECM feature is that its creditline grows larger over time. This means that the amount of cash available to you increases until you withdraw all of it.

For example, if the creditline equals $100,000 and you withdraw $20,000, you would have $80,000 left. But if your next withdrawal is one year later, you would then have more than $80,000 left — because the $80,000 grows larger by the same total rate* being charged on your loan balance. If that rate were to equal 6% per year, for example, your available creditline one year later would be $84,800 (6% x $80,000 = $4,800).

So a growing HECM creditline can give you a lot more total cash than a creditline that does not grow. The HECM creditline grows larger every month until you withdraw the last of your money. The Reverse Mortgage Calculators can estimate how much cash would remain in a HECM versus a non-growing creditline.

HECM creditline growth means that taking a large lump sum of cash from a HECM and putting it into savings or most investments is not wise. If you did that, you would be charged interest on the full amount of the HECM lump sum. If you leave the money in the creditline, you avoid substantial interest charges. You also end up with more available cash, since your creditline grows larger at a greater rate than a savings account or safe investments are likely to grow.

*The rate at which a HECM creditline grows each month equals the current interest rate being charged on the loan plus one-half of one percentage point, divided by twelve. So if the interest rate this month is 5.5%, the creditline would grow by 0.5% (5.5% + 0.5% = 6%/12 = 0.5%). If you had a creditline of $80,000 at the start of the month, it would equal $80,400 at the end (0.5% X $80,000 = $400).

AARP does not endorse any reverse mortgage lender or product.