One of the most amazing and strategic features of the Home Equity Conversion Mortgage (HECM) is the growing Line of Credit (LOC).  One of the reasons that this program is so powerful is that your available funds in your LOC increase over time, which provides you more and more access to your home’s equity.  This is the key to unlocking your hard-earned equity that is trapped in your home. 

Let’s take a deeper look at how and why this LOC grows over time.  First, it is important to understand that the amount of equity that you have access to initially is based on your home’s current value, the age of the youngest borrower, and current interest rates.  This amount is called the Principal Limit and generally ranges between 35-60% of your home’s value, again depending on current interest rates and your age.  Based on current interest rates, today a 62-year-old can access around 35-36% of the value of their home, up to the maximum claim amount which is currently $1,089,300.   Since you are not able to access all the equity in your home initially, your available equity (again called the principal limit) increases over time which ultimately means the older you are, and the longer you live in your home, the more access you will have to your equity. This increase is not based on your home’s future value, however.  So, if home values were to go down in the future, you do not need to worry about your available funds going down.   

This rate that the LOC increases is what we call the growth rate.  This growth rate is calculated on the current interest rate, plus 0.5% (which is the annual mortgage insurance rate).  So, if the interest rate is 6.0% as an example, your growth rate on the LOC would be 6.5% annually.  Keep in mind that the money that you have access to is also free of income taxes (this is not tax advice).  Which means that your available funds are free of income taxes and the growth in the line of credit is also free of income taxes.  This is huge!  This means that at a current growth rate of 6.5%, the available funds in your LOC will double in around 11 years.  Therefore, if you have an available LOC of $350K as an example, your future LOC will grow to around $700K in 11 years.   This is the power of compounding and why it can be extremely powerful to get the LOC started when you might not need the money and allow the LOC to grow and grow for when you are likely to need the money in the future.

Now, there are a few very important items to understand and to keep in mind.  Since Home Equity Conversion Mortgages are insured by FHA, these loans are guaranteed, and the terms are guaranteed.  This ultimately means that as long as you continue to live in your home (it must be your primary residence), pay your property taxes on time, maintain homeowner’s insurance, pay your HOA dues (if applicable), and maintain your home, the funds in your LOC are guaranteed to be available to you.  These guarantees and protections are part of the contract that FHA provides to you under these loans.  Additionally, your loan terms cannot change even if the program changes in the future.   The program does change from time to time, but these are the terms that are available today. 

So, when someone tells me that they own their home free and clear and they don’t need a reverse mortgage, I simply ask them the question; what are you doing with all the equity in your home and how can you access it if you ever need it?  This is a program that can be put in place at any time (starting at age 62), even if you don’t need it, and then you can take advantage of the growth and use the funds (free of income taxes) at any time in the future.  Many people say that this is simply too good to be true but the reality is that it is true.  Sure, there are closing costs and mortgage insurance fees to get the LOC set up but in many cases the costs can be financed into the loan so that your out-of-pocket expenses are usually under $200.