How Does the Line of Credit Grow?
By Dan Hultquist · Understanding Reverse, updated annually
Dan originally authored this book out of frustration. He needed to address the persistent issue that reverse mortgages are not well understood. Since then, Understanding Reverse has been updated annually to address the most common reverse mortgage questions in the general order in which they are asked.
Dan has written in short, focused chapters that are easy to read and understand.
What follows is Chapter 30, which covers how a Line of Credit grows with a reverse mortgage. You can listen to Dan read this chapter using the audio player.
The line of credit is a compelling argument as to why qualified homeowners should consider a reverse mortgage. LOC growth means these pledged funds will not only be liquid and secure, they can also grow to be much larger over time.
The line of credit will grow organically at a rate equal to the compounding rate. This rate can be described as the current interest rate plus 0.5%. Technically, it compounds monthly at 1/12th of that rate.
Example: Lender margin of 2.5% + index rate of 3% + 0.5% = 6% LOC growth rate. Even if the index dropped to 0%, the LOC would still grow at 3%.
Payments made to reduce the loan balance will also increase the line of credit. Many HECM borrowers are unaware that the LOC is boosted with each payment.
If a borrower has cash available, it may be prudent to use it to pay down the reverse mortgage balance. They get two benefits: a lower loan balance and a larger LOC — which will then continue to grow at the compounding rate, available for future use.
The LOC may eventually exceed the home's value if the borrower holds a growing LOC for a long period of time, if a dramatic rise in interest rates makes the LOC grow faster, or if property values decline. This is acceptable — borrowers are permitted to draw funds that exceed their home's value.