Reverse mortgage credit line replaces rental income, expiring HELOC

Mortgage broker: John Holmgren, Holmgren & Associates.

Property type: Single-family home in Berkeley

Property value: $2.275 million

Loan: FHA HECM reverse mortgage; $388,263 credit line; initial rate 7.095%

Backstory: My client, age 73, had a property with a rental unit that was providing $1,000 per month of income. This, along with her Social Security benefit and income from part-time employment, provided a comfortable cash flow situation.

While comfortable, it was never ideal to have a tenant in residence. She also anticipated that her work opportunities would diminish over time. Her backup plan to deal with reduced cash flow was to use her home equity line of credit (HELOC) to supply cash flow needs in a given month. HELOCs typically have a “draw period” of ten years, after which the loan has to be re-done to enable continued draws. Her line of credit was approaching this deadline and she learned that applying for a new HELOC would likely produce a smaller credit line than she expected to need.

When her long-term tenant moved out earlier this year she became aware that the rental unit had developed substantial deferred maintenance that would require a substantial cash outlay to make it rentable “My client, age 73, had a property with a rental unit that was providing $1,000 per month of income. This, along with her Social Security benefit and income from part-time employment, provided a comfortable cash flow situation . ... When her long-term tenant moved out earlier this year she became aware that the rental unit had developed substantial deferred maintenance that would require a substantial cash outlay to make it rentable again.” again. Since she didn’t want to have to rent the unit, she decided to look into a reverse mortgage as a way to replace both the lost rental income and the soon-to-be expired HELOC. She also considered selling the property, but ultimately decided that the home, which was well-located as well as continuing to be suitable for her lifestyle, was where she wanted to stay. The real estate agent she had contacted about a possible sale suggested that she talk to me about reverse mortgage options.

In evaluating the FHA HECM compared to other available products, it was clear that the HECM credit line features made it the best choice. HECM lines of credit never have to be renewed and provide for automatic annual increases in available funds without having to re-apply for a higher credit limit.

The FHA HECM credit line now in place and her prior mortgage paid off, this homeowner now has a solid foundation for future cash flow without having to rent her home nor to continue working.