Reverse mortgages allow you to take your equity in several ways. Determine which method of receiving your loan proceeds is right for you.
Reverse Mortgages: Four Payment Options
There are four options for taking the proceeds of your reverse mortgage. You can receive the money as a lump sum. You can get monthly payments for life. You can receive regular payments for a period of time. Or, you can opt for a credit line to access the money as needed. It is also possible to create some combination of these four payments, like a fixed monthly amount and an credit line for emergencies. Your reverse mortgage lender and your reverse mortgage loan counselor should be able to help you decide which option best fits your needs. Consider the pros and cons of the four reverse mortgage payment options listed below.
Lump Sum Distribution
Pro: This option allows you to solve many cash problems including paying off an existing mortgage and ending monthly mortgage payments. It can also be used to consolidate medical bills or high interest debts. As of January 2009, you can even use this option to purchase a home without monthly payments.
Con: Be careful of this option if you are receiving SSI or other benefits that might be affected by the amount of money you have on deposit at the bank. If you take a lump sum to invest, it may disqualify you for aid programs.
Pro: Monthly payments for life! You need not worry that you will out live the payments, they are guaranteed to continue as long as you use the home as a primary residence.
Con: Since the reverse mortgage lender has guaranteed the tenure distribution for life, they will likely be very conservative with the the monthly payment amount. If it's not enough to solve your cash flow issues, this option would fall short of meeting your needs.
Pro: This option may give you the monthly amount that you need to solve your cash flow issues. Term means that the payments end at a specified time. For example: equity payments of $800 per month for ten years.
Con: Although you may be able more money per month, the money may run out before you pass away or otherwise no longer need the cash. However, if your property has appreciated you may be able to get a new mortgage and more money.
Credit Line Distributions
Pro: This option gives you free access to the equity until the approved loan amount is exhausted. This option is often used as a safety net for emergencies. You only pay interest on that portion of the credit line that you use.
Con: Having a credit line available may be too tempting. Be careful with this option if you think the money might be used unwisely.
Everyone's needs and circumstances are different, and you should not accept a cookie-cutter solution. Reverse mortgage counseling can help you determine which method for taking the proceeds of your reverse mortgage is most advantageous to you.
Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.