An elderly relative currently has a Reverse Mortgage (HECM), received no lump sum in the beginning, and receives a modest fixed amount of cash every month. I have reviewed the statement and it is a bit confusing. Without using the real values, could someone look at these hypothetical values and explain to me how a one-time draw from the current available line of credit does (or does not) affect their "permanent" monthly draws?

Principal Limit Information:
Original Principal Limit: $200,000
Growth of Principal Limit: $100,000
Current Total Loan Balance: $170,000
Current Net Principal Amount: $130,000

Line-Of-Credit Information:
Original Line-Of-Credit Reserve: $100,000
Growth of Line-Of-Credit:  $50,000
Current Line-Of-Credit Loan Balance: $30,000
Current Available Line-Of-Credit: $120,000

Something to keep in mind - the Original Principal Amount was set before the real estate bust. So the home is likely worth a bit less today. And yet it seems the Principal Limit grows based on a formula, not on actual property value. Were the home to sell today, I don't think it would cover the current Loan Balance. And yet the Current Net Principal Limit is still fairly substantial. And likewise so is the Available Line-Of-Credit.

So here is my question - I'm trying to figure out the pros and cons to a one-time draw on the Available Line-Of-Credit. It seems this person could request to draw on the Line-Of-Credit to purchase, say, a $10,000 vehicle, and this would simply decrease the Net Principal Limit and decrease the Available Line-Of-Credit. Additional interest will accrue now, as it also increases the "Total Loan Balance". But in the long run, when they eventually pass away or are forced to move out of the home for health reasons, this additional draw from the Line-Of-Credit, assuming real estate doesn't stage a huge come-back, will be covered by the Mortgage Insurance that is also paid for each month, and the estate will owe nothing.

So this Available Line-Of-Credit seems to me to be money my relative has access to if needed, above and beyond the current monthly stipend, and there is no "cost", at this point, in accessing some of it. The agreement allows for it (limited to a certain annual limit).

Isn't this person almost foolish to not draw and spend some of this if needed or desired?

Or am I missing something?

Edit: I've reviewed the October and December statements. The Available Line-Of-Credit is still growing, even with the interest payment, service fee, mortgage ins premium, and scheduled payment added to the Current total loan balance every month...

  • Loans tend to have some kind of mechanism for the bank to unilaterally call them back. Are there such provisions in your relative’s legal agreement? If so, they might lose their residence if the loan is called, even if the remainder of the loan is completely extinguished or covered by insurance. – Lawrence Dec 29 '18 at 15:16

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