Choices in Receiving Funds

Depending on the type of reverse mortgage, you may have several choices in how you choose to receive the proceeds. The HECM offers the most choices. With an HECM, you may take all of the proceeds in a single payment, as a line of credit that you can draw on as needed (except within the state of Texas), or as a monthly advance. You can combine any of those three options, or change your method of payout at any time for a small processing fee.

Many borrowers choose to combine these choices. For example, if you qualify to borrow $100,000, you may opt to take a lump sum of $25,000, and take a line of credit for $75,000.

If you have an HECM and choose to take a credit line, the total amount available grows larger over time. The credit line grows at an amount that equals the interest rate being charged plus a half percent. A Fannie Mae credit line does not change.

If you choose to receive a fixed monthly payment, you can choose between taking a payment for a specific period of time (called a term plan), or for as long as you live in the home (a tenure plan). A term plan will give you a greater monthly benefit, although only for the amount of time you choose. Once the time period runs out, you still do not have to repay the loan, but then again, you also will no longer be receiving any additional payments.

Under the tenure plan, you get a smaller monthly benefit, but it is guaranteed for as long as you live in the home, regardless of how long that may be. The amount of tenure benefit you get is calculated by the lender based on actuarial tables; in essence, they are guessing how long you will live. If you live longer than they guess, you come out ahead, and the lender (or the lender’s insurance company) must absorb the loss.

Another option sometimes used is to take a lump sum payment, and use it to buy an annuity. This option allows you to receive a fixed monthly income for life, regardless of whether or not you stay in your home, since your monthly check comes from the insurance company from whom you purchased the annuity, and not from the reverse mortgage lender.