The Reverse Mortgage Line of Credit: A Planning Tool for Down Markets and Your 401K

This post is for two readers. The first is a retiree with real savings who has never thought a reverse mortgage applied to them. The second is their financial planner. I wrote it so you can read it together.

I am a mortgage broker in Oregon City. I work alongside planners, not around them, and this is the tool I find myself explaining most often.

The problem it solves

Retirement accounts are great until the year you need money and the market is down. Selling investments at a loss early in retirement does more damage than the same drop later, because the money that would have recovered is gone. Planners call this sequence of returns risk.

The usual answers are to hold a cash bucket, to cut spending in bad years, or to take Social Security earlier than planned. Each one has a cost.

A reverse mortgage line of credit is a fourth answer.

How the line of credit works

A HECM, the FHA-insured reverse mortgage, can be set up as a line of credit instead of a lump sum. You qualify based on your age, your home's value, and current conditions. You do not have to draw anything at closing.

Two things make this different from an ordinary home equity line.

First, there is no monthly principal and interest payment on anything you draw. You still pay property taxes, homeowners insurance, HOA dues if any, and upkeep, and you live in the home as your primary residence.

Second, the unused portion of the line grows over time. Not because your house went up in value. The growth is built into how the line works. The longer it sits unused, the more is available later.

The standby strategy

Set the line up while you are healthy and the home is worth what it is worth today. Leave it alone in good years.

In a down market, draw from the line for living expenses instead of selling from the retirement accounts. Let the accounts recover. If you want, pay the line back down later when markets are up, which restores the available balance.

That is the whole idea. It turns the house into a buffer that costs you nothing in the years you do not touch it except the setup costs, which are real and which I will show you on paper.

Where the 401K comes in

A lot of my clients are rolling a 401K into an IRA around the time they retire. That is the moment the planner is building the withdrawal plan, and it is the right moment to decide whether a standby line belongs in it.

I stay out of the investment side. The planner decides what to sell and when. My job is to tell you what the line of credit would look like for your home, what it costs, and what the rules are. Then I send the planner a one page summary so nobody is working from memory.

What it does not do

It does not make your home worth more. It does not replace a retirement plan. It does not work if you plan to move in a few years, because the upfront costs need time to be worth it. And it is not free money. The balance you draw grows with interest and fees until it is paid back, usually when the home is sold.

Questions for your planner

• If the market dropped in my first two years of retirement, what would we sell?
• What would a standby line do to my withdrawal rate?
• Does a line that grows while unused change how much cash we keep on hand?
• Is there a reason to keep the home free and clear that outweighs this?

If your planner has not seen this used, I am glad to get on a call. I would rather explain it once to both of you than twice to each.

Start with a one page summary

I serve Oregon City, Clackamas County, Multnomah County, Washington County and the rest of Oregon. Message me and I will send a summary you can hand to your advisor.

Becky Chambers, Mortgage Broker, NMLS #2814018. Freestone Mortgage, NMLS #2613454. Licensed in Oregon. Equal Housing Opportunity. This material is not from HUD or FHA and was not approved by HUD or any government agency. For informational purposes only. This is not a commitment to lend. Not investment or tax advice.