Understanding the Reverse Mortgage Line-of-Credit in California
A Reverse Mortgage with a Dynamic Line-of-Credit Feature can be a powerful retirement tool in California. There are many ways a new reverse mortgage can be structured when it is setup. Options include taking a lump sum at closing, receiving a series of monthly disbursements over time and creating a line-of-credit which can be drawn on as needed. This page aims to provide a comprehensive overview of the reverse mortgage line of credit, its benefits, and considerations.
What is a Reverse Mortgage Line of Credit and How Does it Work in California?
What is a reverse mortgage?
A reverse mortgage line of credit is an option for drawing funds out of the reverse mortgage on a "as desired" basis. The size of the line of credit is determined based on a portion of the equity they have built in their homes. This line of credit allows borrowers to access funds whenever they need them, up to a pre-determined limit. One of the best features of the line of credit is the growth feature. The portion of the line of credit which is available and has not been drawn out will continue to grow over time, providing the borrower with increased borrowing potential and access to increasing funds over time.
(note: growth does not occur on funds that have been drawn out already and growth only occurs on what's still available)
How Does The Reverse Mortgage Line of Credit in California Work?
The Line of Credit works similar to a traditional HELOC (Home Equity Line of Credit) but with the benefits and safety offered by a reverse mortgage. The borrower will receive a monthly statement from the reverse mortgage servicer each and every month. The statement shows key items on the loan including current loan balance and available line-of-credit amount. Behind the statement can be found the line of credit withdrawal form. Funds can be accessed by requesting them which is a simple process. Funds drawn out are sent to the borrower and then added to the outstanding loan balance.
There are No Monthly Payments Required on a Reverse Mortgage Line of Credit. Borrower does have to occupy the property plus pay the ongoing property taxes, homeowners insurance and maintenance of home for the loan to stay in good standing. Do those things and you don't have to make any monthly payments until the very end of the loan. The loan will come due and get paid paid back upon a maturity event such as death or sale of home or other maturity event.
How to Access the Reverse Mortgage Line of Credit Funds?
To access the reverse mortgage line of credit funds the borrower(s) fills out the line of credit withdrawal form and indicate how much they want to draw. The form is simple to complete. The borrower signs the form and then sends back to customer service either via regular mail, fax or sometimes there is an online or email option to submit the form electronically.
Customer service will then disburse the funds requested to the borrower. If the borrower provided bank information at time of closing then the funds will be sent electronically via ACH deposit into the borrowers bank account. If no bank info is on file then a check will be sent to the borrower.
Two Main Types of Reverse Mortgage Lines of Credit In California
- HECM Reverse Mortgages
- Jumbo Proprietary Reverse Mortgages
HECM Reverse Mortgage Line of Credit in California
The HECM (Home Equity Conversion Mortgage) is the fha-insured version of the reverse mortgage.
Highlights of the California HECM Line of Credit:
- HECM Line of Credit has a lifetime draw*
- HECM Line of Credit cannot be cancelled if home value drops*
- HECM Line of credit growth rate is higher than the jumbo reverse option
- HECM Line of Credit is fha-insured and HUD will take over the loan and line-of-credit if the lender ever fails or files bankruptcy
- HECM Line of Credit is based on HUDs current lending limits and could offer less funds than the Jumbo Reverse Mortgage potentially could if borrower has a high valued home
*Loan must remain in good standing for the line of credit to remain open and for the growth feature to remain in place. Line of credit will be closed upon a default or maturity event. (such as failing to occupy home, pay ongoing property taxes and insurance and other loan terms)
Jumbo Proprietary Reverse Mortgage Line of Credit in California
Loan Amounts Up to $4 Million
The Jumbo Reverse Mortgage Line of Credit is a private lender loan option. They are also known as Proprietary Reverse Mortgages which offer much larger loan amounts.
Highlights of the California Jumbo Reverse Mortgage Line of Credit:
- Jumbo Line of Credit offers loan amounts up to $4 million - significantly more than a HECM
- Jumbo Line of Credit has a 10-year draw period (however the reverse mortgage itself remains open and will continue for borrowers lifetime or until a maturity event)*
- Jumbo Line of Credit growth rate occurs only on years 1-7 and is 1.5% annually
- Jumbo Line of Credit is NOT fha-insured and is made by private lenders
- Jumbo Line of Credit can be reduced or cancelled by lender if home prices drop significantly after closing
- No Upfront or Ongoing MIP Charges - No Mortgage Insurance Premiums Required (unlike the HECM which has MIP fees) This can result in significantly lower closing costs than a HECM.
*Loan must remain in good standing for the line of credit to remain open and for the growth feature to remain in place. Line of credit will be closed upon a default or maturity event. (such as failing to occupy home, pay ongoing property taxes and insurance and other loan terms)
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John Correll, CRMP
Certified Reverse Mortgage Professional
California Reverse Mortgage Specialists
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FAQ - Frequently Asked Questions About Reverse Mortgage Lines of Credit in California
How Long Can Borrower Draw From Reverse Mortgage Line-of-Credit?
For the reverse mortgage line-of-credit to remain open the loan must be in good standing. The draw period depends on the type of reverse mortgage the borrower obtains.
- HECM Reverse Mortgage Draw Period: Lifetime Draw Period
- Jumbo Reverse Mortgage Draw Period: 10-Year Draw Period
Am I Charged Interest on a Reverse Mortgage Line of Credit?
No - not until the funds are drawn out. Interest and finance charges on reverse mortgages accrue based on the current loan balance and not on the "available" line-of-credit proceeds which have not been draw out yet. This is one of the advantages of the line-of-credit that it can help hold the ongoing loan balance lower which could result in lower ongoing finance charges over time . Once funds are drawn from the line-of-credit they are added to the current loan balance and will then start to incur interest and MIP charges if any such as with a HECM. (there are no MIP charges on Jumbo Reverse Mortgages).
How Is the Size of a Reverse Mortgage Line-of-Credit Determined in California?
In California, this works the same was as the rest of the United States, the principal limit of a reverse mortgage is determined by several factors such as age of youngest borrower, value of home, current lending limits, loan type and current interest rates. Once the principal limit is set, then at closing any closing costs, mandatory obligations like current mortgage and upfront draws that borrower takes at closing are included in the initial loan balance. Any remaining funds between principal limit and initial loan balance can be left in the line-of-credit for future draws.
Can I Get a Fixed Rate Reverse Mortgage Line-of-Credit in California?
No. As of the time of this publication, only adjustable rate reverse mortgages offer the line-of-credit feature. Fixed rate reverse mortgages require a lump sum at closing and currently do not allow for a line-of-credit option.
How Is Qualifying For a Reverse Mortgage Line of Credit in California Different From Getting a Regular HELOC?
In general terms, it tends to be easier to qualify for a reverse mortgage line-of-credit than a traditional HELOC (Home Equity Line-of-Credit). While the qualifications vary depending on the type of reverse mortgage the borrower applies for, some do not have a minimum fico credit score requirement. There is a common sense "underwriting" style financial assessment to review borrowers income and credit to make sure they will be able to handle the payments of their bills including the property taxes, homeowners insurance and other expenses with owing the home. Unlike traditional mortgages that use "debt-to-income" ratios which require more income, reverse mortgages uses a "residual" requirement which tends to be much easier to qualify for.
Considering a Reverse Mortgage Line-of-Credit in California? Why choose Us
Additional Resources on Reverse Mortgage Line of Credit in California
California Department of Real Estate Guide to Reverse Mortgages
County of Los Angeles Department Brochure on Reverse Mortgages
NRMLA Reverse Mortgage Self-Evaluation Checklist
CFPB Guide on Home Equity Lines of Credit (HELOC)
HUD HECM Resource Page For Consumers
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