So, you’ve taken the plunge, and decided to borrow using a reverse mortgage. The next decision – and probably the most important one – is how you should receive disbursement of the funds that you are entitled to.

According to the Department of Housing and Urban Development (HUD), which regulates and insures reverse mortgages through the FHA, you have five options: Tenure, Term, Line of Credit, Modified Tenure, and Modified Term. All are generally calculated using actuarial assumptions (i.e. your age and the value of your home) and tweaked by an FHA mandated “multiplier,” based primarily, it seems, on the ever-changing financial situation of FHA – and not the borrower.

One that selects Tenure will receive “equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.” This is certainly the most conservative choice, and some would argue, the reason why reverse mortgages were created. With a tenure payment system, you can essentially turn the equity into your house into an annuity, to be paid out to you for as long as you live. [As a side-note, you would be well-advised to avoid buying annuities in conjunction with a reverse mortgage, since this adds another layer of administrative costs onto the mortgage, and will most likely be lower than the tenure payments. If the annuity provider advertises an annuity with better terms, he has probably made more aggressive actuarial assumptions, paid for with a reduced equity stake in your home].

Term represents a slight tweak on tenure, since it confers monthly payments for a fixed duration, rather than for the rest of the borrower’s life. Naturally, the advantage is a larger monthly payment than under the tenure system, since it can be calculated irrespective of the borrower’s age. The downside is that after the term expires, you could very well be left with little equity in your home. Another downside of both term and tenure payments is that they are not indexed to inflation, which means the money you receive now will be less in real terms than the monthly payment 10 years from now.

With a line of credit, you can access funds as needed. Some borrowers will withdraw all (or a large portion) of funds up-front immediately after obtaining the mortgage, in order to make repairs and/or modify the structure so that it is more conducive to being elderly. Withdrawing funds up-front for “frivolous” spending, is discouraged, even though your broker might dangle this as a benefit when trying to sell you on the mortgage. Using up your line of credit is akin to depleting the equity in your home, which is why the line-of credit is arguably the most dangerous option, when it comes to selecting a disbursement plan.

There are also two variations on the line of credit, known as modified term and modified tenure. As you probably guessed, these options blend the line of credit with term and tenure, respectively. Under both plans, naturally, the monthly payment that you otherwise would have received under a “pure” term or tenure is simply smaller, since some of the funds (with some input from you, of course), must be set aside for the line of credit. For those that want to withdraw a large chunk of money now for repairs/maintenance, will still retaining the security of a monthly payment, a modified term/tenure is probably the best bet.

There is no way to “beat” the system, since the funds available to you are calculated using the same set of assumptions, regardless of which payout system you select. From the lender’s perspective, you are entitled to all of the equity in your home, minus the upfront/administrative costs, accrued interest, and an allowance to mitigate against the possibility that the amount owed will ever exceed the value of the mortgage. This way, when the home is ultimately sold and/or the mortgage is repaid (whether the borrower is still alive or has already passed), there should be some leftover funds, which will be returned to the borrower or his heirs.

3 Responses to “How Should You Receive Your Reverse Mortgage Payments?”

  1. Ken S Says:

    if your lender ever suggests an annuity with reverse proceeds -end your talks with him immediatly. Reputable lenders actualy provide an anuity disclosure specificaly stating that they are not selling or recomending an annuity.

  2. Ken S Says:

    if your lender ever suggests an annuity with reverse proceeds -end your talks with him immediatly. Reputable lenders actualy provide an anuity disclosure specificaly stating that they are not selling or recomending an annuity

  3. wayne hallenbeck Says:

    If we have a living trust on mom’s house and she takes a reverse mortgage tenure but lives longer then what she has been giving verses what the house sells for does the family have to pay back the difference to the ” BANK ” when she passes?

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