Single-Disbursement Lump-Sum Payment Plan

What Is a Single-Disbursement Lump-Sum Payment Plan?

A single-disbursement lump-sum payment plan allows a borrower to receive all reverse mortgage proceeds at once when the loan closes. This means that there are no monthly disbursements or other additional proceeds later. The single-disbursement lump-sum payment plan has a fixed interest rate, unlike other reverse mortgage payment plans that have adjustable rates.

Interest accrues on the amount of the lump sum and financed closing costs. Costs can also include an up-front mortgage insurance (UFMI) premium, ongoing monthly mortgage insurance premiums, or both. Together, all of these costs make up the amount that a borrower owes when the reverse mortgage becomes due.

How Single-Disbursement Lump-Sum Payment Plans Work

Single-disbursement lump-sum payment plans have higher interest rates than plans that have adjustable rates, a scenario that is similar to a borrower’s first mortgage. If the borrower selects an adjustable rate, the initial rate will be lower, but the amount that they will owe is uncertain. If the borrower chooses a fixed-rate mortgage, the initial rate will be higher, but the borrower will know their total borrowing costs in advance.

The single-disbursement plan can be a good option if you need to pay for a large expense and do not expect to need more money later. For example, funds can be used to pay off a high balance on a first mortgage. Homeowners who want to receive regular monthly payments (or who want the option to borrow as needed) should choose a different option. They could be better off with term payments, tenure payments, a line of credit, or a combination of term or tenure payments with a line of credit.

A regulation first implemented in 2013 places a limit of 60% on the amount of the initial principal limit that borrowers can receive as reverse mortgage proceeds in the first year when they have the loan. This means that the maximum amount available with a single-disbursement lump-sum payment plan is lower than other payment plans.

Of course, a borrower could potentially change payment plans to borrow more. If interest rates have increased significantly since the loan began, then the borrower might receive less money than expected by switching payment plans.

Pros and Cons of Single-Disbursement Lump-Sum Payment Plans

The greatest advantage of a single-disbursement lump-sum payment plan is the ability to get a large sum of money all at once. For example, you might need money for medical expenses or some other emergency. However, it might be better to get a single-purpose reverse mortgage if you need funds for the property itself. Extensive repairs or remodeling for the house are in the lender’s interest, so better rates and terms might be available.

The other benefit of a single-disbursement lump-sum payment plan is locking in a fixed interest rate. When interest rates are low, it often makes sense to go with a fixed rate where possible.

Perhaps the largest drawback of single-disbursement lump-sum payments is that having so much money around can lead to waste, fraud, and abuse. That is particularly true when people have never had so much cash before. Consider a couple who put most of their savings into a home that is now worth $300,000. With a 60% single-disbursement lump-sum payment, they would have $180,000 in cash (minus closing and other costs). That might be much more than they are accustomed to having.

The temptation to waste money is perhaps the least of the issues with single-disbursement lump-sum payments. On one hand, retirees may fritter away their life savings on vacations and other luxuries. On the other hand, people might simply want to enjoy their money while they still can. A tenure payment plan might be better for people worried about running out of money in old age.

Reverse mortgage scams and other forms of fraud can be much more serious. Term payment plans are less vulnerable to fraud because they spread payments out. That gives victims more time to catch on, and less damage occurs.