If you are a homeowner, aged 62 or older, and you have paid off your mortgage or have only a small balance remaining, you may be eligible for a reverse mortgage. A reverse mortgage allows you to borrow against the equity in your home. Keep in mind that you must own the home and use it as your primary residence to qualify.
With a reverse mortgage, there are a number of ways that borrowers can receive their funds. It is important to understand each option and what impacts they will have on your loan.
The reverse mortgage payment options are as follows:
Lump-Sum Payment
With this reverse mortgage option, you receive an immediate lump-sum payment of the entire loan amount available. Some lenders will even waive the origination fees and closing costs for lump-sum borrowers. Seniors should be cautious with this option because it requires excellent money managing skills (if you want the funds to last). Some may consider a lump-sum payment if they have a specific need for a large amount of money (e.g., legal settlement).
Term Payment
The term method for a reverse mortgage pays the borrower an equal sum of money for a selected period of time (months or years). You may choose to have the funds automatically deposited into your bank account. However, the payment amount is fixed and not indexed for inflation ― so if you want additional funds, you must request a payment plan change. The term payment option will generally provide larger monthly payments compared to the tenure payment option, explained next.
Tenure Payment
Tenure is a reverse mortgage option that provides borrowers with regular monthly payments on the condition that one surviving spouse resides in the home. The monthly payments will continue for as long as you live in your home, even if the amount you eventually receive is greater than the home’s value. However, similar to the term option, the payment amount is fixed ― so if you want additional funds, you need to request a payment plan change.
Line of Credit
A borrower may choose to set up a line of credit from which they can withdraw funds as needed until they reach their loan limit. This payment option allows for more flexibility because the money is accessed upon request. Additionally, the unused balance can grow over time (in relation to your home’s appreciation in value and your age). On the other hand, a line of credit can run out, which means you may have to refinance your reverse mortgage. You must also submit written requests to the lender in order to access your line of credit, which can be bothersome. [See related article “Home Equity Line of Credit (HELOC)”]
Modified Term Payment
This option combines features of the “term” and “line of credit” reverse mortgage payment options (described above). With a modified term plan, you receive fixed monthly payments over a predetermined period of time as well as access to a line of credit, providing you with two sources of available funds. However, since a portion of the loan amount is set aside for your line of credit, your monthly payments will be smaller.
Modified Tenure Payment
The modified tenure arrangement combines features of the “tenure” and “line of credit” options (described above). It provides you with fixed monthly payments for as long as you reside in the home and access to a line of credit. The downside is that your monthly payments will be smaller because a portion of those funds will be set aside for your line of credit.
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If you are considering a reverse mortgage, it is important to review the above payment options to determine which method will work best for you. Consider the reasons for your reverse mortgage ― medical bills, school tuition, home improvements, vacation, etc. ― as well as your ability to manage the funds responsibly. While a reverse mortgage can be a great way to set up an additional cash flow, it can also create problems. Just be sure to use the money wisely.