The older you are the better qualified you are to borrow a reverse mortgage. But that doesn’t mean you cannot take advantage of this line of credit if you are a young retiree.
Reverse mortgages are available to all home owners who are at least 62 or above. Many reverse mortgage lenders are on the lookout for prospective borrowers like you. They even try contacting directly by purchasing reverse mortgage leads. They will be more than willing to start up a line of credit for you even if you are as young as 62.
Reverse mortgage credit lines can be immensely valuable especially when the interest and the inflation rates are on a rise. The best part is that your credit line will keep growing over time. So the unused portion of the loan can be withdrawn at a later stage via monthly payments. Neat – Isn’t it?
You can sustain your retirement-income portfolio for a longer period of time by setting up a reverse mortgage line of credit as early as possible. You can let it grow as the interest rates rise. You can always tap into the line of credit whenever you need the money. This way, your money will last for longer.
This strategy is known as standby reverse mortgage or SRM. During times when investments such as stocks and bonds are down, you can draw from your credit line. This will give you a steady income till such time when your investments start recovering. By adopting this strategy, you are also allowing your investments to last longer.
Since you have already established your line of credit and have started to let it grow, you can expect a larger income as you age. However, the most important thing here is not to plunder your credit line for things that are not essential.
SRM – is it for you?
There is one downside to this strategy of SRM. It will reduce your equity. You might find it difficult when trying to move into another home or an assisted-care facility. Things may seem tougher for your heirs too. Considering the kind of fees that you will have to pay to set up your reverse mortgage, it becomes very important to think it over before you jump the bandwagon.
It takes time for your credit line to grow and offset the fees involved in setting it up. So, if you are thinking of moving out of your house and leaving it to your heirs in the coming years, it is better not to establish your line of credit so early.
How it works
Reverse mortgage credit lines come with adjustable rates of interest. These rates are typically reset once every month or year. Initially the reverse mortgage lender would set up your initial credit limit based on your age, the value of your home, its location and the running interest rates. Every year, the mortgage-insurance charge of 1.25 percentage points get added up as your credit line grows by the current interest rate on your loan.
For instance, let us assume you are a 62-year-old borrower who owns a home valued at about $400,000. Your credit line would start somewhere around $200,668, at the initial rate of say 5.70% (interest rate 4.45% and insurance charge 1.25%).
Assuming there is no change in the interest rate, your credit line would grow by 5.70% every year.
So, at the end of 20 years, your credit line would have grown up to $600,000. When you convert this into monthly income you can get about $5000 every month, provided you have not used your line of credit. If you have, the monthly income would be lesser.