Worried That You Don’t Have an Emergency Fund? Utilize the Equity You Have Built Up and Create a Safety Fund Through the HECM Reverse Mortgage.

Taking a look at reverse mortgages to meet critical emergency payments.

Besides paying the regular bills and expenses, there are emergency expenditures that can wreak havoc in the financial wellbeing of an individual. This is truer for retired individuals as they do not have future source of income and live on a calculated budget.
When emergency expenses come up, one can be left scampering for additional debt or help from friends and family. Instead of this there is a better option for the retired person from which they can easily make any payments that arrive. If an individual is above 62 years old, they can use the reverse mortgage on their home to unlock the equity of their house and provide them with a line of credit that they can use for emergency payments.
The major points for a line of credit are:
1.    After the payment for any remaining mortgage on the house is done, the remaining equity can be used as a line of credit that can be used for expenses in the future.
2.    In contrast to the forward mortgage equity loans, no monthly payments are required.
3.    The credit score of the owners is not looked at as the loan is provided against the property.
4.    Interest is calculated on the amount withdrawn and from the time it is withdrawn.
5.    The remaining line of credit in the account will continue to grow by a given percentage which varies according to the market conditions.
Let us look at a simple scenario to see how the line of credit in a reverse mortgage is useful.
Matt and Emma Jones are 72 and 71 years old respectively. A few months back Matt had a minor heart attack, and it was advised that he reduce strenuous exercise. They are looking to make some basic renovation in the house to make it easier for Matt to move. Their current house is valued at $300,000, and the house renovation will cost them $35,000.
Also given the nature of this illness they want to make sure they have a pool of funds that they can use if any medical emergency arrive in the future. They have paid the mortgage on their house, and it is currently debt free.
The calculation for line of credit is:
1 Interest rate index


LIBOR 1 month Rate
2   Plus lender’s margin


Margin taken by the lender
3 Initial loan interest rate


4   Plus mortgage insurance


1.25% Margin of the FHA which is insuring the entire program
5 Initial total loan rate


6 Initial creditline growth rate


7 Lifetime cap on loan rate


Maximum interest rate within this program
8 HECM Expected Rate


9 Monthly Service Fee


10 Value of the home


11 Home value limit


Maximum value to which the home value will be considered
12    Lesser of limit or home value


13 Loan principal limit


14    Less Service fee set-aside


15 Available principal limit


Principal amount available for use
16    Less Financed Items
17       Loan origination fee


18       Mortgage insurance


19       Other closing costs


Fees attached with the program
20 Net Principal Limit


Final Principal available
21    Less home repairs


Amount used for home repairs by Matt and Emma
22    Less Lump-Sum Cash


23      Fixed-Rate Unusable Funds

24    Less Selected Creditline


Final Credit line available
25      Available In First Year


Credit available in first year
26      Available After First Year


Credit available after first year
27 Left for monthly advance


28    Monthly Advance


29      No more lien payments


30    Increase in monthly cash


31 Monthly Term


32 Total Fees & Costs


Total fees and cost involved in taking the loan
Table 1
Some of the major points to be noted in the above table:
⇒    Rate: Points 1, 2 and 4 show the three major rates which are applied. The LIBOR rate, the lender’s margin and the FHA insurance margin. Only LIBOR is variable and changes according to the market condition.
⇒    Point 6 shows the initial rate at which the line of credit will increase. The lender’s margin and FHA insurance of 1.25% are fixed. Hence this rate is dependent on 1 month Libor. This rate is currently at its historic low point and as it changes the rate of appreciation for the line of credit will also change.
⇒    Point 15 shows the available principal amount for the loan. This is generally 55-60% of the actual value of the home and is dependent on the age of the title holders, current interest rate and the assessed value of the house.
⇒    Point 17, 18 and 19 show the fees of the program which include origination fees, mortgage insurance and other closing cost.
⇒    Point 24 shows the final amount available for the line of credit.
They have a total of $118,617 in their line of credit. In the first year, they can use $53,577 besides the amount for their home repair. This division is regulated by government to make sure that the people who take a line of credit do not use the entire amount for an immediate need. This amount will provide them a good buffer in case of future emergencies.
If the line of credit is unused, the line of credit grows at a certain percentage. In our scenario if Matt and Emma need another payment after ten years and if the credit growth is an average of 4% this line of credit would have ballooned to $175,582.
The primary advantages of a line of credit in reverse mortgage are:
1.    Provide available pool of funds for future emergencies.
2.    Continued growth of line of credit while it is not used.
3.    No monthly payments for withdrawn amount.
4.    Credit score is not used for calculation of line of credit.
5.    Possession and title of the house remain with the owners throughout their lifetime.
6.    Unused line of credit can be passed on to the heirs or the estate.
This situation shows that the reverse mortgage can be a life saver in many cases where there is an immediate need of funds. If used judiciously, the pool of funds provided under this program can be sufficient for any household to fulfill their needs and meet any unforeseen expenses which arise in the future.