Line of Credit Payment

DEFINITION of ‘Line-of-Credit Payment Plan.

A recent article on investopedia that explains ye line of credit benefit. A method of receiving reverse mortgage proceeds that lets the homeowner borrow funds only as needed. The line-of-credit payment plan establishes a total amount the homeowner can borrow, called the initial principal limit, based on the homeowner’s age, the home’s appraised value and the loan’s interest rate. In year one, the homeowner can borrow as much as 60% of this amount. In subsequent years, they can access the remaining credit line. The credit line grows slightly each month based on the loan’s interest rate and the unused amount of the credit line.

BREAKING DOWN ‘Line-of-Credit Payment Plan’

A major advantage of the line-of-credit payment plan is its flexibility. You can access a small or large sum as you need it. You don’t get payments every month (or pay interest) if you don’t need the money. If you do want to receive money each month, you can withdraw as much or as little as you need for that month. If you have a large expense, you can take a large withdrawal. If you receive unexpected funds from another source, you can leave your credit line alone. A line of credit can work like a lump-sum, tenure or term payment plan, which are other options for receiving reverse-mortgage proceeds, but it gives the homeowner more control over how and when to borrow money.

Unlike a home-equity line of credit, a reverse-mortgage line of credit can’t be revoked even if the housing market changes or your financial situation worsens. However, the amount you’ve borrowed can be called due and payable if you stop paying your property taxes or homeowners insurance – or if you let your home fall into disrepair (the same is true with other reverse-mortgage payment plans).

If the borrower uses the line of credit sparingly, they will be less at risk of using up their equity and not being able to afford to move later compared with other reverse-mortgage payment plans. Lenders can’t require homeowners to borrow a minimum amount against their line of credit. But homeowners who don’t expect to actually use the line of credit should not take out a reverse mortgage “just in case” because of the high initial costs. The up-front mortgage insurance, origination fee and other closing costs will total thousands of dollars, and the homeowner will pay interest on those costs from day one if they’re financed.

A drawback of the line-of-credit payment plan is that a borrower could use it up completely within 366 days of closing the loan. The homeowner could borrow the 60% maximum of the initial principal limit in year one and the remaining 40% on the first day of year two. He or she would then have no access to further proceeds from the reverse mortgage

Read more: Line-of-Credit Payment Plan | Investopedia
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