One has to be aware about the basics of a reverse mortgage to know how it is different from a regular home loan. Unlike in traditional home loans, instead of paying a sum to the lender every month as payment, the lender will pay you here. However, you will continue to pay homeowners’ insurance, property taxes, and other related expenses; else, you will face risks of foreclosure.
When you learn about the basics of a reverse mortgage, you will see that there are multiple ways to get the proceeds from home equity conversion mortgage (HECM), the most popular type. These options have been termed as “payment plans” by the US Department of Housing and Urban Development.
Which plan should you choose?
Fixed-rate payment plan: In this plan, you get a single payment option, and this is a lump sum payment. This money will be given to you when the mortgage ends. Interest builds upon this amount; the initial rates are high but expected interest rates are likely to be lower with time. The advantage of this type is that it is good for paying off high mortgage balances or for covering large expenses. It is for people who already have an existing mortgage that they must pay off. But borrowers who are not skilled at money management can end up spending the proceeds too fast.
Adjustable-rate payment options: These can be of 5 types. When you choose any one, there are 3 ways in which the interest rates can change.
- Tenure Payment Plan is where you get equal monthly payments till the time the borrower is at the house which is his residence. The payments are decided on the basis of the assumption that you will survive 100 years. This is ideal for those who will stick to their homes for a long time, and who require stable monthly income. But it is not meant for paying off large bills.
- Term Payment Plan offers equal monthly payments only for a set period, like 10 years. This is best when you know exactly how long you are going to stay at the house. Monthly payouts are higher compared to those in the tenure payment plan. But you may end up using home equity and not have any other funds to depend on.
- Line of Credit ensures that you can get money whenever you need it; you decide how much to draw out. This is a flexible option and you can even take out a lump sum, borrow extra funds over the years, etc. You can even leave the credit untouched for a later date when you may need to use it. So, you have greater control, and the untouched portion is likely to grow over the years. The downside is that you can take out a lot of money in the first two years and then be out of funds.
- Modified Tenure Plan will offer fixed monthly payments along with access to credit so long as at least one borrower is staying in the house. The payouts are smaller compared to a straight tenure plan, but it is a flexible option and you get to choose a credit line of your choice. This plan cannot help you when you need a very large sum immediately.
- Modified Term Plan provides fixed monthly payments meant for a preset period of time. It also gives access to credit as long as one borrower resides in the house. The payouts are lower than a straight tenure plan and the line of credit is also smaller. You can decide on the size of monthly payouts and also how long you will avail of them. But this plan may make you run out of proceeds. It is not right for people who have upfront cash requirements.
