Hi, I own my home in ABQ, NM. It is in a popular older neighborhood. I purchased the home about 3 years ago and paid cash. It was in total disrepair at the time and sold at a substantial discount as a result. The remodel was extensive, with most of the house stripped down to the frame, and completely rebuilt, including some of the framing, new roof structure, new electrical, plumbing, and everything. I modernized the floor plan, used the attic to make the ceilings vaulted, added a spacious master bathroom, and so on. It took about 1 year to be completed. I do not have a mortgage and paid cash, from the sale of my previous house, for all the renovations. I do not have any line of credits or debt attached to the house. I am 67 and have social security income of about $1500/mo. I also do some freelance website design and content service but varies quite a bit and isn’t well documented. I do not have a car payment or other large debts. I have some credit card debt, about $3000, which I make regular payments and progress towards paying it off.

I am interested in a Reverse Mortgage with the Line of credit, and I’d like to have access to about $50,000 initially. The reason is that there is a 2nd structure on my property, which was previously a studio/workshop/storage building that is about 500 sq ft. It’s located towards the back of the property. The funds would be used to renovate the building into a guest house or 2nd living unit. I had plans done after I purchased the house, but the renovations of the actual house ended up being more extensive. The plans include a full bathroom, compact but functional kitchen, bedroom, full size washer/dryer, open living/kitchen area, good size closet, and its own patio and small yard enclosed separately from my backyard. It will be well insulated, and will have new windows, new energy efficient heating & a/c system, full size fridge & dishwasher, microwave, and small cooktop. The roof and stucco on the exterior were already redone when the main house was renovated. The unit will have its own off-street parking and entrance gate and paved driveway along the side of my house, which leads to the back of the property.

The addition or conversion to a guest house or 2nd living unit will generate (conservatively) at least $1400/mo on a traditional rental, or upwards of $2500/mo if furnished and offered short term, or month to month. The property value will also increase by about $80-100,000. Currently a fair market value for the property is around $390-400k, assuming this building has $0 value as it is. The area where I live is a popular location, and where guest houses or rentals like this aren’t widespread but common and always in demand. This project would basically double my monthly income, boost the value of the property quite a bit, and wouldn’t affect my ability to occupy my home comfortably.

Does a reverse line of credit potentially work as a good option for me? If I opt to make payments to the line of credit and pay it off since I’ll have more income, does the unused portion just remain available in case I need it, but doesn’t cost anything if I’m not using it? Does the line of credit grow in value over time, or only in relation to market value appreciation. Any idea of what that might look like if I were able to borrow about $50-60k now, wrapping costs into the loan? Looking into the future, say about 20 years, what would I owe and roughly how much equity would remain, and how much will I have been able to use?

how the reverse mortgage line of credit works

Hello Debra,

There is a lot to answer here so let me get right into this.  Firstly, you need to be able to qualify for the loan with your current income and the property will need to qualify for the loan as it is.  What you do with the property after the loan closes is your call if it meets the zoning requirements and does not violate the terms of the reverse mortgage agreement.

Reverse Mortgage Line of Credit Growth

You can pay back any or all the loan at any time without penalty.  The unused portion of the line of credit will grow at a rate equal to the interest rate being charged on the funds you borrow plus the mortgage insurance premium (MIP) renewal rate (5%.  To give you an idea of how the loan would work, if the rate on the loan was currently at 2.00% and the MIP was 0.5%, and you still had $100,000 left unborrowed on the line of credit, that $100,000 would grow at a rate of 2.5% in the first year.  The next year the growth rate would be calculated based on the rate in effect at that time and on the new balance after the growth of the line (minus any advances you took, if any).

If you paid down some of the money you borrowed (and keep in mind that your loan documents specify how prepayments will be applied as shown below) you would then have access to reborrow funds but if you ever pay the balance down to a zero balance, the loan would be paid in full and closed.  If you want to pay the loan down but keep the loan open, be sure to always keep at least a small balance on the line or the loan would no longer be available to you after it was paid to zero balance.

The credit line will continue to grow if you have money available to you on the line.  The growth is determined based on the available line of credit.  It is not determined by the original line of credit and is not affected by the growth of the value of the home.  Even if the improvements you do add considerable value to the home, the line of credit will still only grow based on the interest rates in effect and the amount of the unused line of credit.  You can, however, refinance the loan later if the home and you both qualify under the current HUD criteria.

Reverse Mortgages & Property Requirements

One thing you mentioned worries me a bit and that is the short-term rental.  You cannot use the property for commercial purposes and that includes short-term rentals (Air BnB type rentals).  Month to month is fine, but nightly rentals would be more of a hotel type rental and therefore a commercial usage of the property.

While I have never heard of HUD or a lender calling the loan due and payable for this reason after the loan had closed if the borrower was still occupying the property as their primary residence, I still need to advise you that such usage is prohibited.  If the lender knows this is your plan from the start, the loan would likely not be granted, and you need to know that there is a risk if you use the property for commercial use later.

Repayment & Owing Balance

The amount you would have available to you in 20 years would depend on interest rates, the amount you have in the line of credit and if you use additional draws or make repayments.  Every borrower receives an amortization schedule with their loan documents that will show them an estimate of these figures over the life of the loan, but it can only use known numbers and does not take into consideration rate fluctuations, additional draws, or payments you make.

We have a proprietary schedule that works on an Excel format that would allow you to make many changes in future rates, payments and draws to see what your loan would do with these types of parameters and we would be happy to allow you to run some different scenarios after you visit our free reverse mortgage calculator if you feel this might help you in your decision making process.

Also See: HECM vs HELOC Loan Comparison: Which is Best for You?