Clarifying the Confusion of Reverse Mortgage Line-of-Credit “Growth”
I’ve been studying reverse mortgages for a while now and it’s all pretty clear except one thing: many sources explain the “growth” of the LOC “funds” to the extent that you do not yet utilize the LOC. This in turn leads consumers to wonder if “their money is growing…” like a bank account.
I finally understand the LOC and think I can stop all of the confusion over interest vs growth. The use of the words “growth” and “funds” throughout all of the websites and Youtubes is the problem. A tree “grows” but a line of credit only “gets taller” (higher). Funds “grow”; a line of credit does not “grow.” The use of these terms, along with the natural perception by consumers, that initiating the FDA-regulated home equity conversion mortgage/HECM (even for LOC only) by its very nature implies the transfer of a pile of money (even if only a ledger entry), from one place to another.
Therefore any consumer pictures the “principal limit” (the amount you can borrow) being put in “my account”… from which one either borrows or lets sit. Then we are told it “grows” (by the regulated interest rate plus another factor that’s not important here) to the extent unborrowed. This in turn leads to questions about willful “overfunding” and, for me, “Do I get the unborrowed amount paid back to me when I move/die?” All of this is misperception. THERE IS NO PILE OF MONEY for the unborrowed dollar figure. In fact, that is why it’s called the “principal limit.” It is the principal because it is the amount you qualify to borrow prior to any LOAN interest being accrued; it is a ‘limit’ because it is only a stopping point, not a pile of money… until you borrow/use some or all of it. Then there’s a hypothetical pile of money, that accrues compound loan interest and has a lien against your house for the lender to get it back. If you get a HECM with a PL of $200k that is 100% LOC and NEVER BORROW FROM IT (you would be paying interest if you rolled all of your closing costs into your loan), the bulk of that 200k never moves anywhere. When the house is sold your equity is not reduced by 200k… only the closing costs and compounding interest… that the lien entitles the bank to get back.
