What Is a Single-Disbursement Lump-Sum Payment Plan?
A single-disbursement lump-sum payment plan allows the borrower to receive reverse mortgage proceeds and a large amount of money when the loan closes but no additional proceeds later. The single-disbursement lump-sum payment plan is the only one of the six reverse mortgage payment plans that has a fixed interest rate. Interest accrues on the amount of the lump sum, any financed closing costs (including the up-front mortgage insurance premium), and the ongoing monthly mortgage insurance premiums. All of these costs together compose the amount that the borrower owes when the reverse mortgage becomes due and payable.
Understanding a Single-Disbursement Lump-Sum Payment Plan
The single-disbursement lump-sum payment plan has a higher interest rate than other plans, which have an adjustable rate. This scenario is similar to a borrower's first mortgage. If the borrower selects an adjustable rate, the rate will be lower, but the amount they will owe is uncertain. If the borrower chooses a fixed rate mortgage, the rate will be higher, but the borrower will know their total borrowing costs in advance.
The single-disbursement plan can be a good option for borrowers who need to pay off a high balance on a first mortgage or pay for another large expense but do not expect to need additional reverse mortgage proceeds later. Homeowners who want to receive regular monthly payments (or who want the option to borrow as needed) should choose an adjustable rate option: term payments, tenure payments, a line of credit, or a combination of term or tenure payments with a line of credit. Borrowers who have not demonstrated an ability to manage a large sum wisely are also poor candidates for the single-disbursement plan. In addition, some criminals seeking to defraud seniors have used the single-disbursement plan to steal large sums in a single transaction.
Another drawback of the single-disbursement lump-sum option is that because of a regulation implemented in 2013, the homeowner can only borrow 60% of the initial principal limit in the first year of the loan. This means that a homeowner who could borrow up to $200,000 over time with a different payment plan could only borrow $120,000 (60% of $200,000) with the single-disbursement option. The additional 40%, or $80,000, remains as home equity, which helps to maintain the option to pay off the reverse mortgage later. In addition, the borrower could potentially change his or her payment plan to borrow the other 40%. If interest rates have increased significantly since the loan was taken out, however, the borrower might receive less money than expected by switching payment plans.