Reverse mortgages allow older homeowners to convert their home equity into cash so they can pay expenses ranging from living expenses to medical care. Once approved, borrowers have several reverse mortgage payment options to choose from. They typically can receive the loan proceeds as regular payments, a lump sum, or a line of credit.
Deciding how to take out the money to best meet your goals is an important step for anyone considering a reverse mortgage. Here’s what you need to know about reverse mortgage payment options:
- Types of Reverse Mortgages
- HECM Payment Options
- Proprietary Reverse Mortgage Payment Options
- Single-Purpose Reverse Mortgage Payment Options
- Reverse Mortgage Repayment Options
- Reverse Mortgage Payment Options FAQ
- The Bottom Line on Reverse Mortgage Payment Options
Types of Reverse Mortgages
Eligible homeowners have three types of reverse mortgages to choose from.
Home equity conversion mortgage
HECMs are by far the most common type of reverse mortgage. These loans are federally insured, and subject to rules set by the Department of Housing and Urban Development and the Federal Housing Administration.
To get an HECM, borrowers must be at least 62 years old. They can get a reverse mortgage only on their primary residence, which they must own outright or have enough equity to pay off their existing home loan with the reverse mortgage proceeds.
Borrowers also must meet with a government-accredited counselor, who will go over the pros and cons of a reverse mortgage. Additionally, borrowers need to show they can pay for property taxes and homeowners insurance, and maintain the home in good condition.
Proprietary reverse mortgage
Proprietary reverse mortgages are developed and backed by private lenders. They aren’t insured by the government and don’t have to conform to HUD and FHA guidelines.
These loans are primarily offered to borrowers with high-value homes, and lenders are free to set the terms, including the loan amount and the minimum eligible age of the borrower.
Single-purpose reverse mortgage
Single-purpose reverse mortgages are the least expensive type of reverse mortgage, but they also have the most restrictions.
These loans are available through certain government agencies and nonprofit organizations, and can be used only for the purpose specified by the lender.
HECM Payment Options
There are six main ways that reverse mortgage borrowers can receive their loan funds.
With a lump-sum distribution, qualified homeowners can borrow up to 60% of their home value as a single payment. The disbursement amount is based on the home’s value; current interest rates; the cost of obligations such as property taxes, homeowners insurance, and maintenance; and the age of the youngest borrower on the loan.
For example, if a reverse mortgage borrower’s home is valued at $200,000, they could qualify for a lump-sum HECM of up to $120,000. Assuming the lender assesses their mandatory obligations at $50,000, they could receive up to $70,000 in cash.
The key benefit of this reverse mortgage payment option is getting the funds upfront. This allows homeowners to pay immediate expenses such as a hospitalization or major repairs to their home.
Choosing a reverse mortgage lump-sum disbursement is the only way to get a fixed interest rate on a reverse mortgage. All other options have adjustable interest rates.
Tenure payment plan
Under this reverse mortgage payment option, qualified homeowners receive equal monthly payments as long as at least one borrower lives in the home as their primary residence, or until the full loan amount has been paid out.
Borrowers can choose to be paid less than the maximum monthly amount they are approved for, based on their needs and how long they want the loan to last.
To figure out how much loan a borrower can afford, a lender will look at the projected value of the home, the estimated number of years the homeowner will receive payments, and a compounding interest rate.
For instance, if a 75-year-old borrower chooses a tenure payment plan on a home valued at $165,000, the lender would use the formula to determine a maximum loan of about $84,000 — or around 55% of the home’s value. Assuming the borrower will live in the home for 10 more years, a reverse mortgage would pay them about $700 per month.
This reverse mortgage payment option is popular for its flexibility. In the example above, the homeowner can take as little as $25 per month, or as much as $700 per month for the life of the loan.
Term payment plan
One of the reasons why homeowners select a term reverse mortgage payment plan is to cut down on long-term costs. Borrowing less money over a set period allows homeowners to better plan for expenses and reduce the long-term cost of taking out a loan.
Line of credit plan
A reverse mortgage line of credit works much like a home equity line of credit. With a line of credit plan, qualified homeowners can borrow as much as they need, up to the loan limit. This allows the homeowner to borrow only as much as they need, and only when they need it.
Some line of credit reverse mortgage payment options allow users to take advantage of a “growth feature,” which raises the limit on the line of credit over time.
Returning to the previous example, the 75-year-old homeowner in the $165,000 home would be able to charge expenses to their line of credit, up to the approved amount of $84,000.
Modified tenure plan
For example, on that $165,000 home, the $84,000 loan could be divided so that some of it is used to pay a monthly amount to the homeowner, with the rest set up as a line of credit they can draw from as needed.
Modified term plan
Just like the modified tenure plan, the modified term plan combines a term plan and a line of credit plan. Alongside a credit line that the borrower can draw on as needed, they would receive a monthly payment for a set period of time.
Proprietary Reverse Mortgage Payment Options
HECMs and proprietary reverse mortgage payment options differ in key ways.
While HECMs are backed by the federal government and have specific requirements, proprietary reverse mortgages are offered directly by financial institutions and aren’t insured by the government. These products are often designed for homeowners who want to borrow more than the HECM FHA mortgage limit of $970,800, and also are known as jumbo reverse mortgages.
Proprietary reverse mortgage lenders can set their own origination costs and servicing fees, or require the homeowner to pay more of the closing costs. Moreover, while these mortgages may offer reverse mortgage payment options similar to those of an HECM, the terms are determined by the lender.
State and federal laws require reverse mortgages to be nonrecourse loans, which means if the borrower defaults, the lender cannot collect assets from them beyond the home itself. Borrowers may need to pay more both upfront and when the loan is due to cover the additional risk to the lender.
The rules for obtaining a proprietary reverse mortgage also vary from state to state, so consult with your lender or local government officials before taking out this type of loan.
Single-Purpose Reverse Mortgage Payment Options
As the name suggests, a single-purpose reverse mortgage limits qualified borrowers to using the loan for a specific purpose.
For example, a homeowner may seek a low-cost single-purpose reverse mortgage to cover property taxes, or to pay for home repairs and rehabilitation in preparation for selling the home.
Unlike HECMs and proprietary loans, which are offered by financial institutions, single-purpose reverse mortgages are usually offered through state and local government agencies, and often are limited to low- and moderate-income homeowners.
These loans are not available in every state or community.
Reverse Mortgage Repayment Options
There are specific rules around paying off an HECM that generally apply to other types of reverse mortgages. An HECM needs to be repaid when:
- The borrower no longer lives in the home. A homeowner is considered no longer using the home as their primary residence if they live away from the property for more than 12 months in a health care facility.
- The owner sells the home.
- The borrower or the borrower and their eligible spouse die.
The borrower or their estate or heirs will receive a “due and payable notice” from the reverse mortgage lender, which must be paid within 30 days of receipt. Depending on the circumstances, that window for paying off the reverse mortgage can be extended for up to one year.
The amount that must be repaid is either the full loan balance or 95% of the home’s appraised value, whichever is less.
There are several ways to repay a reverse mortgage:
- Pay the balance due. If the borrower or their heirs have the cash available, they can pay the balance of the reverse mortgage and take possession of the home. Be sure to ask your lender how to buy out a reverse mortgage at the end of the loan.
- Refinance the home. The borrower or their heirs also can keep the home by refinancing it to a standard type of mortgage.
- Sell the home. The borrower or their heirs also may sell the home to repay the reverse mortgage. They would keep any funds left over from the sale after repaying the loan. If the sale price does not cover the loan balance, the lender is reimbursed for the loss by government-backed insurance.
Reverse Mortgage Payment Options FAQ
For more information, check out the answers to a couple of frequently asked questions about payment options for reverse mortgages.
Yes. You can change how you receive the reverse mortgage funds at closing, and many lenders will allow you to do so after closing for a nominal fee.
For tenure and term plans, homeowners will receive their first payment on the first day of the month following closing. On reverse mortgage lines of credit, a lender must provide the money within five business days of the loan funding. On a lump-sum reverse mortgage, the disbursement will take place on an agreed-upon timeline between the borrower and lender.
The Bottom Line on Reverse Mortgage Payment Options
Reverse mortgages can provide qualified older homeowners with income, and there are many ways to take out the funds from a reverse mortgage. Knowing your reverse mortgage payment options is an important step toward using your home equity to achieve your financial goals in your later years.