Reverse mortgage line of credit – how it works

by Darren Moffatt on April 5, 2010

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Unless you need a lump sum of cash for a specific reason (eg; paying out credit cards or to fund home improvements), then a reverse mortgage line of credit will often be the best way for senior Australians to access the money from their reverse mortgage.

How does it work?

A reverse mortgage line of credit is a pre-approved limit of equity that you can draw down gradually over the years as you need money. You only incur interest on the money you use, and the rest of the available money is (usually) still there for future possible use. The interest saving you generate by drawing the money gradually through a ‘line of credit’ can be very substantial.

Eg; Drawing $100,000 gradually over 10 years will cost 30% less than in interest than if you took the same amount as a lump sum.

WARNING: Some Australian reverse mortgages purport to offer a ‘line of credit’ facility, but actually charge the interest on the money already drawn from the line of credit account. That is, if you have a line of credit for $50,000 and you have used $20,000, you might think you have $30,000 left but some banks actually deduct the interest on $20,000 from the line of credit account so that over time the $30,000 available is significantly eroded. Make sure you ask your bank or broker  if your reverse mortgage line of credit is ‘quarantined’ from the compounding interest charge.

For help with this, email me at info@reversemortgagewatch.com.au to check your loan.

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