Line of Credit Options in Retirement
Information
accurate as of
July 8, 2019
in Blog

Line of Credit Options in Retirement

Line of Credit Options in Retirement

There are many options when it comes to borrowing money it can be difficult deciding which option is best for you and your financial needs.  Many seniors consider using a line of credit to help supplement their needs in retirement.  Let’s take a look at some of the popular line of credit options that are available.

Personal Line of Credit

A personal line of credit is similar to a credit card.  You are given a maximum amount which you are able to borrow against and your payments are based on how much you borrow.  The primary difference between a personal line of credit and a credit card is a personal line of credit will typically have a lower interest rate than a credit card.  However, this can make a personal line of credit more difficult to get. Reverse Mortgage Lenders require more screening, including income verification and credit score*. 

  • The benefit of a personal line of credit is that you are able to draw the cash in increments instead of one lump sum, this can help you fill in short term gaps in cash flow.
  • The disadvantage of a personal line of credit is that it’s not tax-deductible and the interest rate can be higher than other loans.  In addition, you are required to make monthly payments on the loan to pay it off. 

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) provides flexibility if you are uncertain what your expenses will be by providing you with a revolving line of credit, instead of one lump sum, that is for a specific period of time (loan term), you can borrow up to its maximum amount during the loan term.  Lenders may offer loans with an adjustable or fixed interest rate.  A HELOC uses your primary residence as collateral against the loan and the value of your home is one of the factors in deciding how much you can borrow.   

  • The benefit of a HELOC is you can use the money towards big expenses such as a home remodel, home repair, medical bills or college education.  The interest may be tax-deductible depending on how you use the money.
  • The disadvantage of a HELOC is the adjustable interest rate can fluctuate depending on current market conditions and the upfront fees may not be worth it if you are borrowing a small amount. You must also make monthly payments to pay down what you have borrowed.

Home Equity Conversion Mortgage Line of Credit

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration (FHA) insured loan1 which enables you to access a portion of your home’s equity.  With the adjustable-rate HECM loan you have the option of choosing to receive equal monthly payments, equal monthly payments for a fixed period of months, and the ability to draw on a line of credit at any time (and in any amount) until the line of credit is exhausted.  A unique feature of the HECM line of credit is its growth rate.  Unused funds in a HECM line of credit will grow over time2 allowing the homeowner more borrowing capacity without having to request a new credit increase.

  • The benefits of a HECM are there are no monthly payments, there are low-cost options available and all fees can be rolled up into the loan.
  • The disadvantages of a reverse mortgage are you must be 62 years of age to be eligible and have sufficient equity in the home. 

If you have questions about the reverse mortgage line of credit option, call 1-800-976-6211 to speak with a licensed loan officer who can help provide you with the facts you need.

1As required by the Federal Housing Administration (FHA), you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.

2 The reverse mortgage loan balance grows at the same rate as the available line of credit. Line of credit growth occurs and is only a benefit when a portion of the line of credit is not used. The unused line of credit grows over time and more funds become available during the life of the loan.

*https://www.debt.org/credit/lines/