Many people are surprised to learn there is more than one way to receive payments on a reverse mortgage. In fact, there are typically three different payment options that homeowners can choose from once the mortgage arrangement is approved. Each one has its particular set of benefits that make it ideal for seniors in different circumstances.
The payment option that most people are familiar with is the monthly installment approach. With this option, the lender forwards a fixed payment to the homeowner once each month. Because there are no restrictions on how the proceeds from the reverse mortgage can be used, it is possible to earmark the money for use in payment monthly living expenses, placing the funds into an interest bearing account of some sort, or even using the money to finance a vacation. For people who do not have sizable pension plans, this monthly payment can make a big difference in the day to day quality of their retirement years.
This monthly payment option can actually be structured in one of two ways. First, the amount of the payments can be calculated to continue for the remainder of the owner’s life, based on projections involving general health and average life expectancy. This approach helps to ensure a steady stream of income throughout retirement. A different approach is to establish a series of monthly payments that will take place for a specific time frame, such as five years. In either case, the homeowner is free to live in the home for as long as he or she lives, with the mortgage only coming due when the owner is no longer permanently living on the property.
A second payment option with a reverse mortgage involves the creation of a line of credit. Rather than issuing a series of payments to the homeowner, the mortgage company will issue payments to the owner when requested. Depending on the terms of the reverse mortgage agreement, there may be some limits on the amount of funds that may be accessed via the line of credit per request, or within a given time frame. This approach provides seniors with the comfort of knowing there is always money available should an emergency arise, such as an extended hospital stay or the need for in-home care during recovery from surgery or an accident.
The third payment option with a reverse mortgage is to receive the entire balance of the loan in one lump sum. This approach can be very helpful when the homeowner wants to utilize the funds to deal with several different financial needs or goals. For example, assuming the homeowner can place the funds into an account that pays a higher rate of interest than the one charged by the mortgage company, it may be possible to maximize the return while using the interest to generate some additional monthly, semiannual, or annual income. A lump sum payment could also be used to improve the property, pay off an existing mortgage, then sell the home at a price that will settle the amount due on the reverse mortgage and still yield a profit for the homeowner or the heirs.
Choosing the best payment option for a reverse mortgage requires that the homeowners look closely at their reasons for taking out the mortgage in the first place. If they really don’t need the money to meet their monthly living expenses, going with a line of credit to help with unanticipated situations may be the best approach. People who wish to maximize the return on their investment may find that the lump sum approach will ultimately yield more money for the estate if the money is used to enhance the property and increase its market value. Last, people who need the money to live comfortably during their retirement years are likely to find that a series of monthly payments makes sense.
Before settling on the specifics of a reverse mortgage, homeowners should make sure they meet the basic criteria for this type of financial arrangement. This includes making sure the homeowner has reached the minimum age required (currently 62) and that the property qualifies for a reverse mortgage. From that point, consultation with financial experts through an approved agency will help ensure that homeowners understand exactly how reverse mortgages work and what responsibilities they and their estate are assuming by entering into this type of financial contract. The counseling can also be very helpful in terms of assisting homeowners to further define their reasons for seeking the reverse mortgage and making sure that the action will in fact produce the results they desire.
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Wesley Pritchard is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as a reverse mortgage.
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