Term, tenure, lump sum, or line of credit; which reverse mortgage equity distribution method is right for you?
The Pros and Cons of Reverse Mortgage Payment Options
The four typess of equity distribution payments on a reverse mortgage are term, tenure, lump sum, and line of credit. Sometimes two of the possible payment methods can be combined, such as a lump sum to pay debt combined with a line of credit for emergencies. Following are the pros and cons of each type of reverse mortgage payment.
Term Payments
Pro: Term payments are for a specified period of time. You can receive equity distributions monthly with a pre-determined end date, for example, $500 per month for 60 months. This payment option works well if there is another source of income that will kick in down the road.
Con: If the expected income source fails to materialize and the home's equity has been spent, you could be left without income at the end of the term.
Tenure Payments
Pro: Tenure payments are for life. They allow you to be free from worrying about an end to the income stream. If after careful budgeting there is a gap in basic support, this payment option can fill that gap indefinitely.
Con: Because the reverse mortgage lender does not know the date the payments will end, usually upon the death of the borrower, it will be very conservative in calculating how much money can be paid to the borrower monthly.
Lump Sum
Pro: A lump sum distribution can allow you to wipe out some or all of the current debt payments. The lump sum option is most commonly used to refinance a traditional mortgage and end monthly mortgage payments. It can also be used to pay high interest credit card debts or accumulated medical bills.
The lump sum option can also be used to purchase a home using a reverse mortgage.
Con: Using all of the equity of the home requires a well thought out plan because the home's equity cannot be spent a second time. There is one chance only to wisely spend the money. It is strongly advised not to use the lump sum option to make an investment such as an annuity. New government regulation will prevent reverse mortgage lenders from cross-selling investment products.
Line Of Credit
Pro: This reverse mortgage payment option is likely to be the least expensive because interest is only charged on the portion of the available credit that has been used. If the line of Ccredit has a zero balance, there would be no interest charged. The borrow has the flexibility to use the line of credit as necessary. This option offers the peace of mind to know money is readily available in the event of an emergency.
Con: It may be tempting to use the available credit for luxury spending. A reverse mortgage is a serious lending tool designed to provide seniors with additional means to support themselves.
Renee Morgan
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