Q: My grandparents are arguing about how the proceeds of a reverse mortgage are paid out to borrowers. Grandma says that they can get a lump sum, but Grandpa says that the funds are paid out in monthly installments. What exactly are the pay-out options?
A: Reverse mortgage loans are available to eligible homeowners 62 and above. Instead of making mortgage payments each month, homeowners with reverse mortgages draw against their home equity. Borrowers must own their homes free and clear or their mortgage balance must be small enough to be paid off with reverse mortgage proceeds.
Your grandparents are both correct; there are actually four options for drawing funds from home equity with a reverse mortgage.
- Lump sum: Reverse mortgage borrowers can withdraw their maximum available equity at closing. This amount is calculated from the borrower's age, the home's value and the mortgage interest rate.
- Monthly payments: Borrowers can elect to withdraw funds in installments from their available equity. They can do this for a specific term, such as five or ten years, or choose a tenure option, which gets them monthly payments for as long as they live in the home.
- Line of credit: This allows borrowers to tap their home equity when they want and only pay interest on the amount of credit used. In addition, the line of credit can increase as the home appreciates.
- Combination: Homeowners can also choose to take their proceeds in a combination of payouts, for example a partial lump sum plus monthly payments.
These loans provide older homeowners with additional income, but there are concerns associated with reverse mortgages that don't apply to "regular" home loans. Reverse mortgage balances grow over time, which could cause problems for homeowners planning to leave their property to heirs. Non-borrowing spouses have found themselves facing foreclosure / eviction when the borrowing spouse dies or moves out.
Homeowners considering a government-backed reverse mortgage (called a Home Equity Conversion Mortgage or HECM) are required to attend reverse mortgage counseling sessions with a HUD-approved counselor. However, all borrowers, regardless of the type of reverse mortgage they're considering, should get professional advice before taking on a complicated obligation that may or may not be right for them.
Request reverse mortgage quotes from several lenders, as costs can vary.