Reverse Mortgage Line of Credit: A Tool for Managing Inflation

When prices rise and the value of the dollar falls, it can negatively impact your retirement plan. That’s because inflation reduces the purchasing power of savings, pensions, and investment income.

Many retirees look to traditional inflation hedges, like Treasury Inflation-Protected Securities (TIPS) or dividend-paying stocks, while completely overlooking their home equity. A reverse mortgage line of credit (RMLOC) can provide a growing, tax-free source of funds that actually becomes more valuable as interest rates rise.

What is a reverse mortgage line of credit?

A reverse mortgage allows homeowners age 62 and older to tap into their home equity without making monthly loan payments. The most common type is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA). Borrowers can choose to receive the proceeds as a lump sum, fixed monthly payments, or as a line of credit.

Unlike a traditional home equity line of credit (HELOC), the available credit on a reverse mortgage grows over time, even if you never use it. This growth is guaranteed by the loan terms and cannot be reduced or canceled by the lender, assuming you meet your loan obligations, like paying the property taxes and homeowners insurance.

How the RMLOC growth rate works

The growth rate on a reverse mortgage line of credit equals the current interest rate plus the annual mortgage insurance premium (MIP). That means if your reverse mortgage has a 6% interest rate and a 0.5% MIP, your available credit would grow by 6.5% annually, compounded each month.

Here’s what that might look like in practice:

Inflation often leads to higher interest rates, which can reduce returns on cash and bonds. For borrowers with a reverse mortgage line of credit, higher rates increase the growth rate of the unused portion.

This means the credit line may expand more quickly during periods of rising living costs. For retirees who rely on investment withdrawals, this growing credit line can serve as a useful reserve during market volatility or high-expense years.

Tax-free compounding: a hidden advantage

Reverse mortgage proceeds aren’t considered taxable income, so drawing from your RMLOC doesn’t affect your taxable income, Social Security benefits, or Medicare premiums. This makes the RMLOC especially useful during:

• Market downturns (to avoid selling investments at a loss)
• Years where investment withdrawals would push you into a higher tax bracket
• Inflationary periods where expenses temporarily surge

It’s a way to create liquidity without disrupting your long-term tax or investment strategy.

Using the reverse mortgage line of credit as a strategic reserve

Many financial planners recommend opening a reverse mortgage line of credit before you need it so it can grow into a meaningful financial buffer. Homeowners often use the reverse mortgage line of credit to:

• Cover rising living costs
• Pay for major home or medical expenses
• Pause investment withdrawals during down markets

For example, a 62-year-old who opens a $150,000 RMLOC today could see it grow to roughly $269,000 by age 72, assuming a 6% average growth rate. That reserve can provide peace of mind over a long retirement.

How a reverse mortgage compares to other inflation hedges

Homeowners often consider several approaches to manage rising costs in retirement. The chart below highlights when each option may be most effective, and how the reverse mortgage line of credit differs from other inflation-hedging tools.

Considerations before opening a reverse mortgage

A reverse mortgage line of credit can be valuable, but it isn’t right for everyone. To start with, you need to meet the following requirements:

• Be at least 62-years-old
• Live in the home as your primary residence
• Have sufficient home equity
• Stay current on your taxes, insurance, and maintenance

Growth only applies to the unused portion, and interest accrues on any funds you draw. A HUD-approved counselor or financial advisor can help you determine whether this strategy fits your long-term plan.

The bottom line

Inflation can challenge even the strongest retirement plans, but a reverse mortgage line of credit can help offset that pressure. By growing at a compounded rate, the RMLOC provides a tax-free, flexible reserve you can draw from when you need it. For many homeowners, it’s not just a borrowing tool, but a powerful way to protect their retirement from rising costs.