Okay, so tell me why everyone who can doesnâ€™t use a reverse mortgage this way.
The Home Equity Conversion Mortgage, or HECM for short, comes in various flavors.Â Thereâ€™s the reverse mortgage, the HECM for Purchase, which can be used to buy a home while conserving oneâ€™s cash, and the HECM Line of Credit.
Iâ€™ve written about all of these variations, but right now I only want to focus on one of themâ€¦ the HECM Line of Credit.Â Iâ€™ll make my points very directly and concisely, and then someone please tell me why everyone who can, doesnâ€™t have a HECM Line of Credit.
- The HECM Line of Credit can never be cancelled, assuming the borrower remains in his or her home and can continue paying property taxes, insurance and normal maintenance.Â Home Equity Lines of Credit, or HELOCs, as many learned during the meltdown of 2008-09, can be unilaterally cancelled at any time by the bank.
- The HECM Line of Credit is guaranteed to increase every year by whatever the interest rate is on the HECM reverse mortgage.Â So, if the interest rate were five percent, then your line of credit would increase by five percent every yearâ€¦ regardless of the value of the home.Thatâ€™s rightâ€¦ even if the value of your home goes down, your HECM Line of Credit is guaranteed to rise each year.That means that if you opened a $300,000 HECM Line of Credit today at 65 years of age, and didnâ€™t touch the available funds for 20 years, that funds available to you at age 85 would be roughly $800,000â€¦ no matter what the home is worth at that time.Â (Assumes an annual interest rate of five percent.)To have access to $800,000 or $1 million that you donâ€™t have to make monthly payments on, and that can never be cancelled?Â Thatâ€™s not the best thing youâ€™ve ever heard of related to financial security during retirement?Â That doesnâ€™t sound better than a Long-term Care insurance policy?
- With the HECM Line of Credit in place, should at 85 you or your spouse need nursing home care, assisted living, or in-home caregivers, having access to that kind of money that you donâ€™t need to worry about paying back would seem invaluable.
- The HECM Line of Credit does not require the borrower to make any monthly payments ever, and if thatâ€™s what a borrower chooses to do, the loan will be repaid when the home is sold or upon the death of the borrower and spouse, when the home would presumably be sold or refinanced by the heirs.
- The HELOC, on the other hand, is an interest only loan for 10 years, after which time it becomes fully amortizing, meaning that the monthly payments will shoot up ten years after you got the loan.Â So, if you got a HELOC at 65, youâ€™d be facing payment shock at 75, when itâ€™s likely that your income has gone down.In addition, qualifying for a HELOC today is no easy task for people in their retirement years.Â Itâ€™s no longer about how much equity you have, itâ€™s all about your monthly income, which is the one thing retirees generally donâ€™t have in large supply.What Iâ€™m saying is that if youâ€™ve stopped getting a paycheck from work, itâ€™s unlikely that youâ€™ll even get a HELOC today, not that youâ€™d want one as HELOCs in retirement are a path that can easily lead to foreclosure or being forced to sell your home in your later years.
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Okay, so who wouldnâ€™t want such a line of credit? Â One thatâ€™s guaranteed to increase every year even if the homeâ€™s value remains flat or even goes down.Â Thereâ€™s nothing else that does what the HECM Line of Credit doesâ€¦ and itâ€™s a hedge against home values falling because with the HECM reverse mortgage, you can never owe more than the home is worth.
Letâ€™s say you borrowed $800,000 from your line of credit, and then left the home to your kids upon your death.Â And letâ€™s just imagine that in that year, home prices fell and your homeâ€™s market value was only $600,000.
Well, your kids could either walk away and let it go back to the bank, without owing another dimeâ€¦ or they could buy the home for 95 percent of that current market value.Â So, even though you borrowed $800,000, your heirs could purchase your home for 95 percent of $600,000, the homeâ€™s market value at that time.Â
Thereâ€™s nothing else that offers that sort of protection against being underwater either.
Itâ€™s incredible to me that EVERYONE who can, doesnâ€™t want to open a HECM Line of Credit today.Â I canâ€™t imagine what the argument would be against doing so.
If you think you can, please donâ€™t hesitate to make the case to me at firstname.lastname@example.org.Â I canâ€™t wait to hear what you have to say.
P.S. If you or someone you know wants to know the facts about HECM reverse mortgages, HECM Lines of Credit and HECM for Purchase loans, contact my Reverse Mortgage Intelligence Team at Shore Capital to see how the different advantages would apply to your individual situation.Â (No salesperson will call, by the way.)Â
Stacey AndelmanÂ email@example.com
Mortgage Loan Originator
NMLS ID #1394312
(714) 315-6060 cell
Shore Capital Corporation
2030 Main St, Suite 1300 #78
Irvine, CA 92614
(714) 625-8938 office