What's a reverse mortgage line of credit?

If you own your home and you have built substantial equity in the property, you can borrow a reverse mortgage against your home. Typically, senior homeowners can borrow a reverse mortgage to supplement their income, pay healthcare costs, or finance a large purchase. One of the payment options you have is the reverse mortgage line of credit.

A reverse mortgage line of credit allows senior homeowners to borrow against their home’s equity without making mortgage payments. It is a revolving fund, and the credit is guaranteed for your lifetime, and it allows borrowers to repay the balance at any time without paying a penalty. You can choose to make payments or defer interest until a later time when the loan matures.

What is a line of credit?

A line of credit is a payment method that allows borrowers to access a defined amount of money as needed and interest will only accrue on the active balance. It gives you access to a preset amount of money on demand, and it can help you with expenses like medical expenses, home improvements, or unexpected car maintenance.

A line of credit is similar to a credit card since it allows you to borrow money, pay it back, and borrow the same funds again without having to send a new loan application every time. Generally, you do not pay interest on the money available to you until you make a withdrawal. You can use a line of credit to consolidate several small debts into one debt with a lower APR.

What is a Reverse Mortgage line of credit?

A reverse mortgage line of credit is a payment option that allows senior homeowners to borrow against the equity in their homes without making monthly mortgage payments. Unlike the traditional line of credit, a reverse mortgage line of credit does not require borrowers to make payments; instead, the balance accrues over the loan term, and it only becomes due when the homeowner moves out, sells the home, or dies.

When you get approved for a reverse mortgage line of credit, it means you have a preset amount that you can borrow over a specific period, but interest only accrues on the portion you have withdrawn. The reverse mortgage line of credit is guaranteed for your lifetime, and you can choose to make repayments or defer payments until when a qualifying event occurs.

How reverse mortgage line of credit works

A reverse mortgage line of credit shares certain similarities with a home equity line of credit (HELOC) since both loans allow borrowers to convert home equity into cash. The amount of money you have available is based on your age, the market value of your home, and the reverse mortgage interest rate.

Since the line of credit is a revolving fund, you can borrow the money over and over again as long as you don’t max out. The reverse mortgage line of credit grows over time, and it can grow large over time, giving you access to more funds. You can decide how you will use the funds you receive from your line of credit, either to pay the outstanding mortgage balance or for everyday expenses like home repairs or groceries.

For example, if you own your home outright, and it is valued at $400,000, you can apply for a Home Equity Conversion Mortgage (HECM) to get a $200,000 reverse mortgage line of credit. If the loan application is approved, you can withdraw part of the line of credit when needed, and interest will only accrue on the borrowed funds. The remaining funds will continue growing over time, and if you withdraw funds sparingly, it could grow into a bigger pool, hence giving you access to more funds. 

Who can get a reverse mortgage line of credit?

If you are planning to borrow a reverse mortgage line of credit, there are certain reverse mortgage requirements you must meet. These requirements include:

You must be at least age 62 or older.

You must have substantial equity in your home; you must own the home outright or have a low balance that can be paid off at closing.

The property must be your primary residence.

You must go through a counseling session with a HUD-approved counseling agency.

You must not have defaulted on any federal debts like federal income taxes or student loans.

You must pass a financial assessment to prove your ability to meet ongoing expenses like property taxes, homeowner insurance, and property maintenance costs.

When you get a reverse mortgage, do you have to get a line of credit?

Generally no. A reverse mortgage line of credit is one of the payment options for reverse mortgages. Most borrowers receive the loan proceeds in a variety of ways depending on their needs and the rules governing reverse mortgages. You can opt to receive payments as a lump sum payment, monthly payments, a line of credit, or a combination of these options.

If you choose to use a line of credit, you can withdraw up to 60% of the approved credit in the first year. Interest will only accrue on the active balance, and you can free up credit by paying down the principal balance.

Reverse mortgage life of credit vs. Home equity line of credit

A reverse mortgage varies from a Home Equity line of credit (HELOC). Here is how these loans compare:

Qualification

You must be age 62 or older to qualify for a reverse mortgage, use the home as the primary residence, and have considerable equity in your home. You will also need to pass a financial assessment. In comparison, there is no age requirement for HELOC, and you can take a HELOC against any home you own, including a second home.

Due date

Reverse mortgages do not have a set due date, but only become payable once they have matured after certain events like the death of the last surviving spouse, the last borrower moves out, or the home is sold. In comparison, HELOCs have required payments, and the repayments begin at the end of the draw period. HELOCs give you access to a line of credit for a set period, making only interest payments, and then during the repayment period, you will pay both principal and interest.

Required loan payments

A reverse mortgage does not require borrowers to make monthly mortgage payments during the loan term. If you have an unpaid balance on your current mortgage, you can use the reverse loan to pay off the outstanding balance to free up the cash flows. In contrast, a HELOC requires monthly payments.