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Choosing a Home Equity Conversion Mortgage Payment Plan

There are six different options when selecting payment for the most common type of reverse mortgage: a Home Equity Conversion Mortgage. These different plans affect how much money you receive and when. So which one is right for you?

Option 1: The Fixed Rate Payment Plan - Single-Disbursement Lump-Sum Payment

The only option for those desiring a fixed rate payment plan is a payment method called a single-disbursement lump-sum payment. With this option, all available proceeds from the loan are given at the closure of the mortgage. Initially, interest rates with this plan are higher than those of adjustable rates, but over time the interest rates are likely lower.

Why Choose This Plan?

This type of payment is effective if the proceeds are going towards paying off a high current mortgage balance or to cover other large expenses. In situations where all the proceeds are needed at once, this option is the best.

Why shouldn’t you choose this plan?

After the initial loan proceeds are disbursed, you do not receive any other payments. Without good money management skills and techniques, you may be at risk of exhausting all of the cash proceeds too quickly. Additionally, because you receive all of the proceeds up front, you do not receive all of your equity, as you would in an adjustable rate payment plan. This option could also have repercussions on your ability to qualify for government benefit programs like Medicaid.

Option 2: The Tenure Payment Plan

With this option, you get monthly payments for as long as the home is the primary residence. Even if the loan balance becomes more than the value of the home, the payments will continue. These payments only end if you move or pass away.

Why Choose This Plan?

This type of payment suits those who are planning to live in the residence for a large amount of time. The monthly payments provide a stable source of income for as long as you live there.

Reasons Not to Choose This Plan:

Because this plan provides income in small, monthly amounts, it will not be effective for those needing to pay off any large bills. If you need to move from your home for any reason, or you fail to meet the tax, insurance or maintenance obligations, the income from the reverse mortgage ceases, and the HECM mortgage becomes due.

Option 3: The Term Payment Plan

Similar to a tenure payment plan, this type of payment gives you monthly installments. However, with this option, the borrower chooses a specific duration of time (for example, 10 years) in which to receive the proceeds.

Why Choose This Plan?

This option provides monthly installments with payment that is higher than that of a tenure payment plan. Although payments cease after the term has ended, you can continue to live inside your home until you move out or pass away.

Why Not?

This option does not provide payments for life.  You run the risk of using up all of your home equity too soon with this plan of payment.

Option 4: The Line of Credit

With this option, you can make withdrawals as you need cash. You get total control of how much you wish to draw and when you draw, as long as the cumulative amount is below the principal limit. There is not set schedule of payments with this option.

Why Choose This Plan?

You have total control and flexibility over how you wish to draw from your proceeds. You can customize and adjust how you desire to withdraw as you see fit. Additionally, the unused portion of credit continues to grow. Also, you only pay interest on that which you borrow. This type of line of credit cannot be revoked.

Why Not?

If you borrow 60% of the available principal in the first year, it is easily possible to exhaust the other 40% too quickly, leaving you without any remaining proceeds to utilize. This option requires the ability to properly and wisely manage funds.

Option 5: Modified Tenure Plan

This option allows for you to have a fixed monthly payment along with an accessible line of credit for as long as the home is the primary residence. These payments are smaller than those with a complete tenure plan, however, with the line of credit, you have access to the maximum amount of funds.

Why Choose This Plan?

Like the line of credit option, this plan has total flexibility. There is versatility between how you desire to set up the monthly payments and the line of credit. For example, you can have larger monthly payments with a smaller line of credit, or you can have smaller monthly payments with a larger line of credit. This option can effectively prevent you from depleting you home’s equity.  

Why Not?

Because of the split flow of cash between monthly payments and the line of credit, there is no way to draw a large sum of money of needed.

Option 6: Modified Term Plan

This plan allows for monthly payments for the specific term that you decide, along with the line of credit for as long as the home remains the primary residence. Similar to a modified tenure plan, these monthly payments are smaller than that of just a term payment plan, but the line of credit does allow for access of the total funds.

Why Choose This Plan?

Again, there is flexibility between how long you desire your term to be, how big or how small you desire your monthly income to be, and how big or how small you desire your line of credit to be. Even at the end of the term, you still get the proceeds left over through your line of credit.

Why Not?

Because the payments are for a specific amount of time, it is possible to deplete your funds if you are not careful with your line of credit. Additionally, similar to the modified tenure plan, this payment plan is not ideal if you need to draw a large amount of money at one time.

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