Reverse Mortgage Draw Options – Choose the Line of Credit
The Reverse Mortgage is promoted both as an option that allows seniors to add to their retirement income and as a “loan of last resort” for retirees who must access the equity that they hold in their home in order to meet regular expenses.
The HECM loan was initiated in 1989. Slight revisions have been made to the loan over the years. However, in 2012, Congress directed the Department of Housing and Urban Development to make significant changes to the loan structure. Congress wanted to more thoroughly protect borrowers AND the Federal Housing Administration which insures the loan, after it was revealed that the FHA had amassed a 1.6 billion dollar deficit due to payouts for defaulted loans.
There have been, and continue to be, many discussions over various aspects of the loan. However, most lenders and senior financial advisors agree that the line of credit feature offers borrowers the best option for using their HECM proceeds in their retirement planning.
Since 2012, some of the changes to the Home Equity Conversion Mortgage (HECM) program have made reverse mortgages a more sustainable product for the FHA as well as for borrowers and their non-borrowing spouses. Now, more than ever, qualified borrowers who could benefit from a HECM are exploring the Reverse Mortgage option, since they see more clearly how a reverse mortgage can function as a viable supplement to a senior borrower’s retirement portfolio.
In particular, the line of credit feature is seen as the ticket to helping the HECM ditch that “loan of last resort” reputation and be viewed as an integral part of an individual’s retirement planning. Associate professor of finance in the John E. Simon School of Business at Maryville University in St. Louis, Dr. David Johnson, comments “If you are talking about planning, then yes, that has to be the focus”
A line of credit for a Reverse Mortgage offers borrowers who are planning for the long-run and not seeking a last resort peace of mind. With the line of credit they know that they will have needed funds at their disposal. The interest on the funds allows the kitty to grow and the borrower(s) can use those funds at their discretion — to supplement monthly income, pay for unexpected health emergencies or delay drawing Social Security benefits.
Dr. Johnson says that “clearly, there are so many different ways you can use that line of credit. I’m confident that if you do a reverse mortgage and have a line of credit - whether you access it or not - it still changes people’s minds and gives them peace of mind knowing they have money that they can access in a short period of time if they need to.”
Johnson demonstrates the various ways that borrowers can use the line of credit. “It’s almost like a nest egg that’s going to grow even if you may not need the funds right now.
In his paper titled “Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market” Johnson discusses current and future challenges with which retirees must contend. He demonstrates ways in which a reverse mortgage can be used to provide supplemental retirement income.
The standby reverse mortgage line of credit, he points out, aids in retirement planning as it benefits borrowers who are thinking of ways to fund their senior years.
Johnson commented that “We need to start thinking about and planning what we’re going to do in the future, because most of us are going to outlive our assets and if we don’t have some alternative, it’s going to be much tougher when it occurs.”
He acknowledges, however, that, while reverse mortgages have the potential to help many retirees, lack of education is still the biggest impediment to greater utilization.
“You can’t force people to become educated… If someone out there has a strong opinion that there’s something wrong about reverse mortgages it’s difficult to change their opinion… People don’t realize how creative you can be; how many different ways you can use it; and how it makes sense to set it up now even though you may not need it now, because you can use it in the future.”