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How Does The Line Of Credit For A Reverse Mortgage Work?

Usually, your mortgage’s principal balance and line of credit grow at the same rate. The balance and line of credit equal the principal. Interest and insurance are charged to to the balance but not the line of credit. However, when you borrow from the credit line, it decreases, and the loan’s balance increases.

A reverse mortgage program is often misunderstood. Some people assume the loan balance holds a large chunk of the principal. However, the line of credit grows at the same rate as the loan balance, so a line of credit could accumulate into a large sum if left unused.

To explain this concept, is it helpful to work with a relevant example. Think of two different people who take out reverse mortgages with $100,000 principal limits. In ten years, the limits grow to $200,000. One person withdraws the whole $100,000, so his or her loan balance is $200,000 after 10 years. The other person never uses his or her credit, so the $200,000 principal at the end of the 10 years reflects the line of credit’s value. This individual can withdraw the entire $200,000 after 10 years and keep the same loan balance as the first person. Bypassing the accumulation of interest, the second individual receives double the amount of money. Opening a line of credit as soon as possible provides a much higher availability of further credit over what would be received by opening a reverse mortgage at a later time.

Not using your line of credit definitely works in your favor. In the future, there may be new limitations placed on line of credit growth potential. Until this point, growth from a reverse mortgage can be a valuable tool that helps supplement your retirement income.