Analysis of Reverse Mortgage Payment Options

Reverse mortgage is a loan against your home that the borrower does not have to pay back until he lives there. This is a method to get cash value from your house without leaving it and even worrying about repaying it. As you can see reverse mortgage is very different from the “normal” or “usual” mortgage schemes. One can get payments from reverse mortgage in 5 different ways. These are explained below:

  1. Reverse Mortgage Term payment option: This option ensures that the borrower receives fixed monthly payments but for a particular time period
  2. Reverse Mortgage Tenure payment option: Under this option fixed monthly payments are provided as long the borrower lives in the home
  3. Reverse Mortgage Line of credit payment option: Under this option the borrower decided when to withdraw funds and how much
  4. Reverse Mortgage Modified term payment option: This options adds access to line of credit to a term payment option
  5. Reverse Mortgage Modified tenure payment option: This option adds access to line of credit to a tenure payment option

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Pros and cons of various Reverse Mortgage payment options:

Term payment option:

  1. Pros

    1. Funds are deposited automatically in account
    2. Larger monthly advances compared to tenure option
  2. Cons

    1. Fixed amount, cannot change based on change in requirements
    2. Monthly advances are not indexed for inflation
    3. After the period, new source of income have to be identified by the borrower

Line of Credit payment option:

  1. Pros

    1. Access to funds based on needs
    2. The funds not used by the borrower grow based on the growth the equity value of the house and considering the age of borrower (which also keeps increasing)
  2. Cons

    1. Sometimes access to funds leads to indiscipline in withdrawing them, leading to their exhaustion, to gain more funds refinancing of the reverse mortgage will be required

Tenure payment option:

  1. Pros:

    1. Keep receiving fixed amount till you live. These payments can sometimes be more that house’s worth! But even then as a borrower, you never own more than your house worth
  2. Cons:

    1. Payments are not indexed to inflation, thus the fixed sum can feel inadequate after 10-15 years
    2. No flexibility in terms of payouts in case of emergency requirements

Modified Tenure and Term options in addition to above combine benefits of credit line in case of emergencies. But the limitation in these options is that monthly payouts are smaller as a portion is dedicated for credit line when needed.
There is no right or a wrong payment option, it depends a lot on individual requirements. In many cases if borrowers have other steady income coming, they may prefer a tenure payment as additional income generated from other sources takes care of emergency requirements etc.

It is very important to identify needs and then choose the option. It is best take advice from experts / friends and others before deciding.