THE HECM LINE OF CREDIT

 

95% of HECM borrowers utilize the adjustable rate (ARM) program, as the fixed rate option is a one-time-use program, that is far less beneficial in most circumstances. The adjustable rate is NOT such a bad thing! I know that everybody likes the security of knowing that they have a fixed interest rate, but the reality is, having an adjustable rate allows for much more fixability with the program. Also, if rates do adjust higher that has potential to be advantageous! I will explain below.

 

When clients take out an ARM HECM, one of the key features is the growing line of credit. This line of credit will allow you access to available funds that you can utilize in any way you choose. The line of credit also allows you to draw on the funds in a way that best meets your financial goals.

• You can draw funds in lump sum withdrawals

• You can set up a monthly tenure payments to yourself

• You can leave the line of credit and access funds at any point through the loan

• Or any combination of these above methods

 

THE GROWTH FEATURE OF THE LINE

 

One of the key features of the ARM HECM is that it also comes with a line of credit. The line of credit has a guaranteed growth feature, meaning that over time, the unused portion of available equity will grow at the same interest rates as the loan. (Example: If you have $100,000 in available funds on your line of credit, and your interest rate is 4%, then after one year, your new available funds will be $104,000). By leaving a large line of credit available, you can in fact grow your availability faster than the current amount you owe is increasing.

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THE ADJUSTABLE RATE FEATURE

 

The initial interest rate is set based on a global market index LIBOR (London Interbank Offered Rate). Your interest rate will be the current LIBOR rate + a margin. (Example: If the current LIBOR rate is 2%, and your margin is 1.9%, then your initial interest rate will be 3.9%). The national average for margin fluctuates slightly, but consistently hovers is around 2%. (https://www.housingwire.com/articles/47696-hecm-margins-remain-stable-at-198/) Within some companies there is flexibility on the margin which can be strategically selected to fine tune the loan to match your specific goals.

 

The Margin is a locked feature of the HECM, and the LIBOR is the part of the rate that adjusts. Once your loan closes, your cumulative interest rate will be locked for 12 months. After one year, your rate will adjust based on the LIBOR rate at the time, + the margin that was set up at the beginning (Example. Using the above scenario, if the LIBOR rate after one year increases to 2.5%, and your margin is 1.9%, then your new interest rate will be 4.4%). This new rate will be locked for the following 12 months, and your rate will adjust annually moving forward. NOTE* Your rate cannot go up by more than 2% in any given year, and it cannot go any higher than 5% of the original rate.

 

HOLD ON! Before you get in the mindset of  lowest interest rate being the best, please understand that a higher interest rate MAY be a very good thing.

 

If your plan in setting up a reverse mortgage/HECM is to leave the bulk of the funds available for the future, or utilize paying down the line as a savings account, then having a higher interest rate could benefit you. The higher the interest rate is on your ARM HECM, the faster your line of credit will grow, and the more cash you will have available to you over time. Remember, as long as you stay in the home, pay property taxes, insurance, and maintain the property, the amount of interest that has accrued on your balance doesn’t affect your monthly cash flow. A higher rate and higher balance still result in no minimum payment required.

 

 

HECM VS HELOC

 

One common question that people ask is “Why not just do a Home Equity Line of Credit” (HELOC) if I want to access my home’s equity?” This is a good question, and in some circumstances, a HELOC may make more sense. However, there are several key differences to consider.

 

• HELOC will require a monthly payment, whereas HECM does not. If you are on a fixed income in retirement, adding another monthly payment obligation may be counterproductive to your financial goals.

• HELOC can freeze access at any point, whereas HECM cannot. If the housing market takes a down-turn, it is very common for banks to freeze access to and Home Equity Line of Credit, as to cut off access to borrowing any more funds. If the HELOC is your backup plan for finances, this could be detrimental. The HECM however, cannot be frozen or taken away (as long as you continue to meet your obligations) and your credit line access is guaranteed to grow, regardless of the market conditions or home value.

• HELOC’s have a 10-year term and then you can’t pull money off of them any longer.  The only way to gain access at that point would be to try and qualify for a new HELOC—many times without income this is impossible.  A HECM will stay accessible for the entire life of the loan, so you never have to “requalify” to pull your own equity out of your home.

 

It is difficult to communicate the complexity of how the HECM line of credit works in just one webpage. In its simplicity, the line of credit offers a guaranteed access to funds, and the unused portion will continue to grow in availability over time. The uses of this product are limitless, and the financial security it provided in retirement is unparalleled.