Who wouldn't want their home equity line of credit to grow each month despite market conditions? When a homeowner uses a reverse (home equity conversion) mortgage or HECM, they can choose to obtain a line of credit. With a line of credit in place, there will be organic growth each month as the line of credit will increase by the same rate being charged on the loan balance. Typically this would be at a higher rate than the house is appreciating at and at a higher rate than one would receive in a savings account or Certificate of Deposit or Money Market account.
Let's use a simple example for a refinance under ideal circumstances. Homeowner refinanced into a reverse mortgage and obtained a new loan of $100,000 (which paid off their existing loan and covered closing costs) and they obtained a line of credit of $100,000. If they make no payments on their loan, the loan balance will increase each month by the amount of interest due and the amount of FHA mortgage insurance due. If the interest and mortgage insurance due in month one were $312.50 then the line of credit would grow by the same amount. The loan balance goes up and the line of credit goes up by the same amount! (because the starting loan and starting line of credit were the same). Now if the homeowner made a voluntary payment against their loan, not only would the loan balance go down, but the line of credit would go up by the same amount.
The ideal situation is for the loan balance to be the same or lower than the line of credit. This can easily be achieved when the homeowner has sufficient equity or is even willing to put some cash into the transaction to achieve this balance. Of course, some may not have the equity or cash to achieve this balance but the line of credit, no matter the size, does grow organically at the same rate being paid on the loan. And the line of credit can always be increased by making voluntary payments against the loan balance.
To access funds from the line of credit, it is best to set up for direct transfer with the servicer. Upon request, the funds can be transferred to the homeowners checking or savings account. Funds can be requested online, by telephone or by completing a form and emailing, faxing or snail mailing it.
There are many ways the HECM line of credit can be used to help a retiree. For example, if the homeowner needed to withdraw $20,000 from retirement assets held in stocks or mutual funds and the market was down, they could draw from the line of credit instead. Withdrawing from any stock-based account when the market is down, seriously speeds up the depletion of the account. If the HECM line of credit were used when the market is down then when the market goes back up, the HECM line of credit could be replenished if the homeowner chose to do that. Payments on a HECM are always voluntary but remember the taxes and insurance are always due and a home requires maintenance too.
HECM lines of credit are also a good source of emergency funds for unexpected expenses. If you have a HECM line of credit, it can be used for any purpose you choose.
