Reverse mortgage payout options provide homeowners with financial flexibility based on their needs and preferences -- but what happens when borrowers' circumstances change? The good news is that eligible reverse mortgage borrowers can change their method of receiving payments from their loans.
Currently, about 90 percent of reverse mortgages in the US are backed by the Department of Housing and Urban Development (HUD) through its FHA Home Equity Conversion Mortgage (HECM) program. Here are the choices HUD offers for receiving HECM proceeds:
- Single disbursement lump-sum settlement: All funds available for withdrawal are paid to the borrowers at closing. HUD recently changed its guidelines for lump-sum settlements made at closing; they are now limited to the greater of 60 percent of the principal limit or the mandatory obligations (property taxes, hazard insurance and FHA mortgage insurance) plus 10 percent of the principal limit.
- Tenure: This option provides monthly payouts for as long as one of the borrowers lives in the mortgaged home and maintains it as his or her principal residence. The monthly payments are determined by your age, the interest rate and your home's value. Tenure payments are lower because there is no set termination date for the loan.
- Term: Choose this payout to get higher monthly payments for a selected period of time, perhaps five or ten years.
- Line of Credit: Borrowers can access funds as needed. But it gets better -- not only can HECM lines of credit never be reduced, canceled or frozen, they actually grow over time (the "growth factor" is currently equal to your interest rate plus .5 percent). You wouldn't need to refinance to get access to more money.
- Modified Tenure: Borrowers can take part of the loan proceeds as a line of credit, plus they receive (smaller) monthly payouts for as long as they occupy the home. This option combines the stability of monthly income with the flexibility and growth potential of a line of credit.
- Modified Term: Borrowers take out a line of credit and receive monthly payments for a specified period of time. This combination offers the security of a line of credit combined with monthly payouts made over a specified time period.
Mortgage servicing companies typically charge a $20 fee for changing the method of payment for reverse mortgage payouts.
AARP Cautions Borrowers About Lump Sum Payouts
AARP, an advocacy organization for persons 50 and older, cautions would-be reverse mortgage borrowers to carefully evaluate their current and expected financial situations before choosing a reverse mortgage with a lump-sum payout. This advice also applies to anyone considering changing an installment payout to a lump-sum payout, as taking a lump sum can lead to running out of funds sooner than expected.
Consult a financial advisor, retirement or estate planner prior to changing reverse mortgage payouts to determine which payout option best matches your immediate and long-term needs. A consultation with an objective financial pro can also help avoid risks of running out of funds or not having being able to pay property taxes and hazard insurance.