When most people picture a reverse mortgage, they picture a lump sum. But one of the most useful ways to set one up is also the least understood. You can take it as a line of credit you don't have to touch, and the amount you're able to borrow grows the longer you leave it alone.
How the growth works
With a Home Equity Conversion Mortgage (HECM), you can establish a line of credit and simply let it sit. The unused portion grows every month at the loan's current interest rate plus the annual FHA mortgage insurance premium of 0.5%. You're not earning interest in a bank-account sense. The amount you're able to borrow increases.
That has a counter-intuitive effect. In a higher-rate environment, an unused HECM line of credit grows faster, so your future borrowing power expands regardless of what your home's market value does day to day.
Why it's different from a HELOC
This is the part that surprises people who assume a HECM is just a fancier home equity line of credit. A traditional HELOC can be frozen, reduced, or canceled by the bank, and banks have done exactly that during past recessions, right when homeowners needed access most. A HELOC also requires monthly payments.
A HECM line of credit behaves differently. As long as you meet your obligations as a homeowner and stay current on property taxes, insurance, and maintenance, the line can't be canceled or reduced, and there are no required monthly principal or interest payments. That guaranteed access is a big part of why it works well as a standby reserve.
Where retirees use it
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A market buffer. Draw from the line in down years so you're not selling investments at a loss.
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A healthcare safety net. Set it up early so funds are ready if in-home care or a medical bill arrives later.
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An inflation hedge. Because the available credit grows over time, your reserve tends to keep pace as costs rise.
The considerations
Setting up a HECM involves upfront costs and mortgage insurance, usually financed into the loan. Drawing on the line means interest accrues and the equity left to heirs decreases. The growth feature also rewards early setup, since the reserve has more time to expand, which is why many advisors suggest establishing it while you're healthy rather than waiting for a crisis. You keep up taxes, insurance, and upkeep throughout, and a HUD counselor reviews it all with you first.
Frequently asked questions
Does the money in a HECM line of credit earn interest?
No. The unused line isn't an investment and doesn't pay you interest. Its growth only increases the amount you may be able to borrow later, and it isn't taxable income.
Can the bank freeze or reduce my HECM line of credit?
No, as long as you meet your obligations as a homeowner. Unlike a HELOC, a HECM line of credit can't be frozen or cut.
What rate does the unused line grow at?
The current loan interest rate plus the 0.5% annual FHA mortgage insurance premium, applied to the unused balance each month.
Want to learn more about reverse mortgages?
Talk to an Improve Retirement expert advisor today.
This article is for educational purposes and is not financial advice. A reverse mortgage is a loan that must be repaid. Consult a licensed advisor and complete HUD-required counseling before proceeding.