Growing Creditlines
Source: AARP Foundation Reverse Mortgage Education Project | April 25, 2003
The Home Equity Conversion Mortgage (HECM) program gives the most choices in how you can get your cash from a reverse mortgage. You can take all of your loan as:
- a single lump sum of cash; or as
- a "creditline" account of a specific dollar amount that you control; you decide when to make a cash withdrawal from this account and how much cash to withdraw; or as
- a monthly cash advance for a specific period of time, or a monthly advance for as long as you live in your home.
In addition, you can choose any combination of these options, and you can change your choices at any future time.
Loan Amounts
The amount of cash you can get depends on your age, current interest rates, and your home's value. The older you are, the more cash you can get. If there is more than one owner, the age of the youngest owner is the one that counts. The lower interest rates are when the loan closes, the more money you can get. You can also get more money from a lender who charges lower loan fees.
In general, the more your house is worth (its appraised value), the more money you can get. But the value is subject to a limit of $625,500. If your home is worth more than $625,500, you are still eligible for a HECM loan. But the amount of money you can get is based on $625,500, not on your home's actual value. For example, if your home is valued at $700,000, then the amount you can borrow is the same as it would be if your home were valued at $625,500.
The current home value limit of $625,500 went into effect on February 24, 2009, and will remain in effect until December 31, 2009. Congressional action during 2009 could extend this limit into 2010. If Congress doesn’t act on this matter, the limit would most likely revert back to the previous limit, which was $417,000.
Loan Amount Examples
The table below shows how much you could get from a HECM if you take it all as a single lump sum of cash at closing or as a creditline:
• if the value of your home is $150,000, $250,000, or $350,000;
• if the expected interest rate on the loan is 6%, 7%, or 8%;
• if the age of the youngest borrower at closing is 65, 70, 75, 80, 85, or 90; and
• if the servicing fee is $35, closing costs are $2,500, and the origination fee is the maximum allowed by HUD (see What Are the Costs?).
| Home Value | Age | Lump sum or credit line when expected rate is: | ||
| 6% | 7% | 8% | ||
| $150,000 | 65 | $74,325 | $59,626 | $47,530 |
| 70 | $81,782 | $68,513 | $56,965 | |
| 75 | $89,638 | $78,084 | $67,672 | |
| 80 | $97,930 | $88,228 | $79,088 | |
| 85 | $106,260 | $98,400 | $90,820 | |
| 90 | $114,250 | $108,233 | $102,207 | |
| $250,000 | 65 | $129,925 | $105,026 | $84,530 |
| 70 | $142,182 | $119,713 | $100,165 | |
| 75 | $155,038 | $135,484 | $117,872 | |
| 80 | $168,530 | $152,128 | $136,688 | |
| 85 | $181,960 | $168,700 | $155,920 | |
| 90 | $194,650 | $184,533 | $174,407 | |
| $350,000 | 65 | $186,025 | $150,926 | $122,030 |
| 70 | $203,082 | $171,413 | $143,865 | |
| 75 | $220,938 | $193,384 | $168,572 | |
| 80 | $239,630 | $216,528 | $194,788 | |
| 85 | $258,160 | $239,500 | $221,520 | |
| 90 | $275,550 | $261,333 | $247,107 | |
You can divide the amounts in the table between a lump sum and a creditline. For example, a 75-year-old borrower living in a $250,000 home getting a HECM loan at 7% expected interest could select:
- a lump sum or creditline of $135,484; or
- any combination of lump sum and creditline that totals $135,484, for example, a lump sum of $30,000 and a creditline of $105,484.
The Reverse Mortgage Calculators give you an estimate of HECM cash benefits based on your age, home value, and current interest rates.
Creditline Growth
So a growing HECM creditline can give you a lot more total cash than a creditline that does not grow. The HECM creditline grows larger every month until you withdraw the last of your money. The Reverse Mortgage Calculators can estimate how much cash would remain in a HECM versus a non-growing creditline.
HECM creditline growth means that taking a large lump sum of cash from a HECM and putting it into savings or most investments is not wise. If you did that, you would be charged interest on the full amount of the HECM lump sum. If you leave the money in the creditline, you avoid substantial interest charges. You also end up with more available cash, since your creditline grows larger at a greater rate than a savings account or safe investments are likely to grow.
*The rate at which a HECM creditline grows each month equals the current interest rate being charged on the loan plus one-half of one percentage point, divided by twelve. So if the interest rate this month is 5.5%, the creditline would grow by 0.5% (5.5% + 0.5% = 6%/12 = 0.5%). If you had a creditline of $80,000 at the start of the month, it would equal $80,400 at the end (0.5% X $80,000 = $400).
AARP does not endorse any reverse mortgage lender or product.
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