When you have made the big reverse mortgage decision and are selecting a payment option, they will have several choices. One such option is the reverse line of credit. This payment plan allows the homeowner to borrow funds only as needed. It takes the homeowner’s age, the assessed value of the home, along with the loan’s interest rate into account, afterwards creating an initial principal limit (this represents the maximum amount the homeowner can borrow) based on that information. In the first twelve month period, the borrower can draw upon up to 60% of this amount, and in later years they can access the remaining credit line. This credit line increases a little bit each month, based on the loans’ interest rate and the unused amount.
This is a terrific option for homeowners who have other methods of steady income, because the borrower can simply use the line of credit as necessary, not all the time. A big plus to this payment option is its flexibility, and how it allows the homeowner to access as large or as small an amount as they want to use at a given time. There is no requirement to borrow a minimum per month, and lenders are not allowed to require it.
One of the most desirable feature of this method is that it can act as a combination of all three of the previously mentioned methods (lump sum, tenure, and term), depending on the borrower’s circumstances. They are in the driver’s seat, as to when and how they borrow money.
This line of credit cannot be taken away, even if the housing market were to change or if the homeowner’s financial situation deteriorated. However, the borrower must continue to meet all of the conditions of their loan. As an example, if they stop paying their property tax or homeowners insurance, the amount that they took out could be made due and payable.
If a homeowner uses the money wisely, and of course receives the line of credit sparingly, they will have much more equity available in the event they need it in the future. While the line of credit option might seem like the best one due to its flexibility and the control it offers the homeowner, it does have its shortcomings. The initial costs, such as the up front mortgage insurance, origination fee, and other closing costs can run into the thousands.
Another detracting factor is that, if a homeowner isn’t wise with their money, they could end up using everything within 366 days of closing the loan. If they borrow the initial 60% maximum in their first year, and then the remaining 40% on the first day of the second year, they would be tapped out and receive no further resources. All in all the line of credit is a great choice, when all options are looked at.
