Before I delve into why setting up a reverse mortgage in early retirement may be beneficial, let’s go over the nuts and bolts of the loan itself. Homeowners who are at least 62 years old and whose primary residence has a relatively small mortgage or is free and clear, can use the equity in their home as part of their retirement planning.
The HUD HECM program (Home Equity Conversion Mortgage) is considered a reverse amortized loan. That is, instead of paying down on the principal each month, interest accrues on the principal balance of the loan as you pull equity out to use for whatever reason. When you vacate the home for good, the loan must be paid off, either by you or your heirs. This loan is a “non-recourse” loan which means you will never owe more than the home is worth. You can also pay it off anytime without penalty.
There are many ways to utilize funds from a reverse mortgage. In this article, I’ll discuss a Line of Credit and why it may be beneficial to set one up in early retirement for future use.
The HECM Line of Credit has certain qualities specifically geared to older homeowners.
- The line of credit never closes, no matter how many years you have it.
- When you do use it, you never have to make a monthly payment on the balance.
- You can draw from the line any time during your lifetime (as long as you live in the home)
- The LOC has a growth rate tied to the interest rate + 1.25%. This is where the magic of compounding kicks in.
- The longer you have the LOC, the more money there is to withdraw (assuming you haven’t drawn down on the line) due to growth rate compounding.
No matter if the value of your home goes up or down over the years (yes, we all remember 2009), the compounding will continue to grow the line since it is tied to the rate plus 1.25% not to the value of the property after loan closing.
Why is setting up a Line of Credit so important? Because no matter how healthy we are now, we still fear the unknown. And one of those unknowns is whether we will need assistance in our older years. Yes, you certainly can invest in a Long-Term Care Policy and I encourage you to speak to an insurance agent about such coverage. However, having a Line of Credit in place to cover health and/or care issues (or any emergency that may occur like a leaking roof or to purchase a car) is invaluable.
Setting up the LOC during your early retirement years will allow you to reap the compounding benefits, and provide you with a much higher line to draw from than waiting even 10 years into the future.
The table below illustrates the power of the growth rate.*
Let’s assume a home value of $636,160 which is the maximum value we can work with right now. The growth rate is 4.726%. Assuming the rate does not go up (which would be beneficial for growth if it did), here is an example of setting up a LOC at 62 years old versus waiting until you are 72 years old.
|Term||Age||LOC $ Amount||Age||LOC $ Amount|
As Jackie Joyner-Kersee so succinctly put it, “It’s better to look ahead and prepare, than to look back and regret.”
Helen Young is the Branch Manager of Choice Lending Corp’s San Diego office. She has more than 20 years of experience in mortgage lending. She obtained her Bachelor’s degree from San Diego State University in Business Administration and Accounting and is a Certified Public Accountant (CA inactive). She is a member of the San Diego Association of Realtors, Pacific Southwest Association of Realtors and the Women's Council of Realtors. She belongs to the San Diego Regional Chamber of Commerce and is a member of the California Society of Tax Consultants. She is also a CA Real Estate Broker.
*The information in this article should not be considered actual tax advice. Please consult your tax professional to discuss your specific tax situation. Actual amounts may differ based on the annual interest rates and other variables.