By: Dona DeZube
Published: October 20, 2011
Reverse mortgages come with lots of payment options. Find the right one for you.
A reverse mortgage counselor, an accountant, or a financial planner can help you think through the options.
1. One lump sum gives you all your cash at once.
Pros: Useful if you want to invest in something that requires a lot of cash up front, such as starting a small business. You’ll get a fixed interest rate (all the other options come only as adjustable-rate mortgages).
Cons: You pay interest on the whole amount you borrow. If you don’t need all that money now, you’re paying interest needlessly. Plus, you may not be able to take more out of your house if you run into financial trouble later in life. If you go with one lump sum, be sure you have enough guaranteed future income to pay household expenses, such as insurance and property taxes, for the rest of your life.
2. Tenure gives you the same amount of cash each month until you move out or die.
Pros: The payments continue as long as you live in the house — even if you live to be 101 years old, you’ll still be getting that monthly payment.
Cons: You have to swap into a different payment option if you need a lump sum for a big repair.
3. Term provides a set amount of cash for a fixed period of time, such as $500 a month for 5 years.
Pros: Useful if you need income to cover a monthly payment that’s only going to last a certain amount of months, such as a car payment that ends in two years, or if you need income to tide you over while you wait for another source of income to start coming in, such as from an annuity.
Cons: It may be cheaper to take a lump sum at the beginning of your mortgage and pay that debt off all at once instead of using the monthly mortgage payment for that bill.
4. Line of credit allows you to take as much or as little as you need each month until the line of credit is gone.
Pros: You only pay interest on the cash you need each month. You can take more cash when you have unexpected expenses, such as needing a new furnace. Each year you that don’t use it, your line of credit increases because your life expectancy decreases by a year.
Cons: If you take out too much money, you can drain your line of credit.
5. Modified tenure provides a set monthly payment as long as you live in your home, and there’s also a line of credit available.
Pros: You’ll have a check every month to help with living expenses, and a line of credit to cover unexpected expenses. You only pay interest on the cash you take.
Cons: You have to get a variable rate reverse mortgage to use this or any of the other plans besides the lump sum. With a variable rate, you don’t know how much the interest rates will be in the future. And although you don’t have to pay back that interest, your heirs might -- heirs receive the difference between what your house sells for after you die or move out, and what’s owed on the reverse mortgage.
6. Modified term provides a monthly payment for a fixed number of months and a line of credit when you need extra cash.
Pros: Good if you have a bill to pay every month for a set number of months, such as a personal loan you’re paying off, and you’d like a line of credit for unexpected expenses.
Cons: It may be cheaper to pay off that personal loan when you first get your reverse mortgage, depending on what the interest rates are for your personal loan and your reverse mortgage.
Changing your reverse mortgage payment option
If you choose a payment option and it doesn’t work out, you can swap into another one — unless you chose the lump sum. You can’t change a lump sum option because you’ve already taken all the cash you were eligible to get.
Still, it’s better to pick the right plan from the get-go, so think about what you need to use the cash for and how that monthly reverse mortgage payment fits in with your overall financial plan.