Welcome back – in this post, part 7 of a 10 part series, our goal is to provide you a good overview of the HECM line of credit, how it works, and how it can be a great tool in your toolbox for long-term retirement planning.

While there are various options in accessing home equity proceeds from a reverse mortgage as we discussed earlier, including lump sum, term and tenure payments, many retirees in their long-term planning do not need immediate access to these funds and prefer to maintain flexibility in accessing those proceeds when needed.

That is where the HECM line of credit can be an ideal choice, whether as the sole form of reverse mortgage or in combination with the other options for accessing home equity proceeds.

The HECM line of credit is a variable rate line of credit, where drawn amounts are charged interest at an effective rate equal to the one-year U.S. treasury rate, plus the lender’s margin, plus the annual mortgage insurance premium (0.5%). It is important to note, this interest rate is charged only on borrowings under the HECM line of credit, not on unused capacity.

There are a few unique provisions of a HECM line of credit that make it an especially useful tool for long-term retirement planning:

- First, capacity under the HECM line of credit is contractually guaranteed to actually grow over time at a rate equal to the effective rate, regardless of changes to the underlying fair market value of the home; and

- Second, this HECM line of credit cannot by contract be cancelled, reduced or called due, as long the borrower abides by the terms of the reverse mortgage as we’ve noted before in terms of payments of property taxes, insurance and property maintenance, even if this growing HECM line of credit at some point exceeds the fair market value of the home.

These characteristics of a HECM line of credit make it stand out from traditional lines of credit issued by banks to borrowers. A traditional line of credit is subject to additional qualifying income requirements and require repayment over time, whereas repayment by the borrower under the HECM line of credit is entirely at the borrower’s discretion. A traditional line of credit can be frozen, cut or cancelled, as was the case for many borrowers during the Great Recession in 2008 and 2009, when many of those borrowers needed those funds the most. On the other hand, a HECM line of credit cannot frozen, cut or cancelled by contractual guarantee. On top of this, a HECM line of credit is contractually guaranteed to grow at the effective rate as discussed above, meaning that over time, capacity under this line of credit continues to grow.

With these contractual guarantees, a HECM line of credit can be a valuable, dependable long-term tool for a well-thought out retirement plan, acting as a key “buffer” asset that can be utilized if and when necessary to manage the long-term financial uncertainties we touched on earlier, such as sequence-of-returns risk in your investment portfolio and encountering large or unexpected expenses during your retirement years.

One final note – HECM rules do get changed over time, and it is possible that rules may be enacted that impact one or more of the benefits of the HECM line of credit. This is another argument, in the context of a HECM line of credit, to take advantage of the current rules and provisions and open a HECM line of credit early in retirement, allowing that line of credit to grow and be grandfathered in to the existing framework.

In our next installment, we plan to provide an overview of how a HECM can be repaid or otherwise satisfied, and the options available to the borrower over the course of retirement and the borrower’s heirs.