Reverse mortgages, which have become a popular way for seniors to access additional income from their home, can be paid out in several ways. Applicants must be at least 62 years old, have significant equity in the home, and live in the home as their primary residence. The reverse mortgage payout amount will depend on a variety of factors, including the applicant's age, current interest rates, and the appraised value of the property.
Before choosing a payout options, seniors should carefully consider their current financial situation and their future needs, including their ongoing expenses and possible one-time costs such as emergency health issues or home repairs. According to Can I Retire Yet?, an average monthly budget for a "restrained upper-middle-class lifestyle" should be around $4,000, or about $48,000 a year.
Seniors also should take into account real estate taxes and property insurance, which they must continue to pay. A Wall Street Journal report showed that one of the most common reasons seniors with reverse mortgages fall into foreclosure is failure to pay these bills.
Reverse mortgage payouts generally are made in lump sums, lines of credit, or monthly allocations.
One of the most popular reverse mortgage payout options, a lump-sum payment provides all of the proceeds from the loan upfront at a fixed interest rate, and it requires forfeiture of the remaining amount of the loan. The sum is subjected to first-year withdrawal limits, which are about 60 percent of the applicant's initial principal limit.
This option can be enticing because it provides a larger sum of money at one time, but there are drawbacks, including the total amount of money received. Payments spread out over time generally will add up to a larger reverse mortgage loan payout.
The biggest danger of lump-sum payments comes for younger borrowers. When they are ready to sell the home in 10 or 20 years, they may not have any home equity left. Health and financial issues that compound later in life could be expensive, and younger borrowers may not have cash left from the lump-sum reverse mortgage payout to afford the cost. Factoring a lump-sum payment into monthly expenses years into the future takes spending discipline.
This option pays the borrower a monthly amount as long as the borrower lives in the home or for a fixed number of years, depending on the terms of the loan.
For borrowers who plan to stay in their home a long time, this option can be beneficial because the value of the loan will grow as the value of the home increases. Monthly payments also can provide a reliable supplement to monthly income for many years.
This option is best for borrowers who anticipate staying in their home for many years and who are not dependent on the income, as the loan ends when the borrower moves out of the house.
Line of Credit
Like the monthly payment option, a line of credit has built-in limits that can help retirees allocate the money thoughtfully over long periods of time. A line of credit allows borrowers to withdraw money as needed, such as to pay for large medical expenses. The loan could grow over time if a house's value increase, which could up the amount of available funds.
Borrowers also can combine these reverse mortgage payout options, such as taking out a small lump sum and receiving the remaining amount in monthly payments.
Experts advise caution for borrowers considering any type of reverse mortgage payout. As retirees age, their health and family situations could unexpectedly change and force them to sell the property or move, negating the loan and the income. Before taking out a reverse mortgage, all potential borrowers should talk to a financial counselor about whether it is their best financial option.