Pros and Cons of Reverse Mortgage Equity Distributions

A reverse mortgage lender can offer a qualified borrower four ways to take equity from his home: tenure, term, lump sum, or line of credit. Depending on the financial goals a borrower of reverse mortgage age, each equity distribution option meets a different need. Careful, long term planning is required to make sure the best payment option is selected. Following are the pros and cons associated with each type of payment.

Tenure

Pro: Tenure payments are for the rest of the borrower's life. The borrower has the security of a continuous payment as long as the terms of the loan agreement are met.

Con: Because the borrower's lifespan is unknown, the reverse mortgage lender will use very conservative calculations to determine the maximum reverse mortgage amount. The borrower will not get the highest dollar amount with this payment choice. The monthly payments are not indexed to rise with inflation and over time the monthly amount could become insufficient.

Term

Pro: Term payments are for a specified period of time. For example: five hundred dollars per month for five years. For the senior who is expecting money in the future, this payment option fills the gap. The monthly payments will be larger than the tenure option because the reverse mortgage lender has a specific term for calculating the maximum claim amount.

Con: If at the end of the term things do not go as planned, the borrower may find himself with a financial shortfall. Careful long term planning is the key, as well as some type of backup plan.

Lump Sum

Pro: Most seniors use this option to end monthly payments on debt such as a traditional mortgage, medical bills, or high interest credit cards. Stopping monthly payments may permanently solve the borrower's cash flow problems.

Con: Because all or most of the equity is taken upfront, interest on the full amount begins accruing from the first day. This type of reverse mortgage payment option will likely cost the most in interest. Paying off debts might be cheaper by means of an unsecured loan such as a home equity loan or low interest credit card.

Line Of Credit

Pro: If the available credit is accessed in small amounts as necessary over time, this can be the least expensive payment option. It is ideal for senior borrowers who are concerned with meeting unforeseen emergencies in the future. A line of credit can be used in conjunction with most of the other payment options. For example: a borrower could take a lump sum to pay off an existing mortgage and stop monthly mortgage payments, then attach a line of credit with the remaining available equity for emergencies.

Con: Having a spontaneous way to access equity can be dangerous. It requires significant discipline not to use the money for frivolous spending. This payment option should not be used to make risky investments.