What Is a Tenure Payment Plan?
A tenure payment plan (or annuity plan) is a way to receive reverse mortgage proceeds in which the borrower gets equal monthly payments for as long as they live in the home. The tenure payment plan has an adjustable interest rate. Monthly payments are calculated under the assumption that the borrower will live to be age 100.
In general, a tenure payment plan is best for somebody who desires retirement income and plans to remain in their home for the rest of their lives.
- Reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.
- A tenure payment plan is a way for a borrower to receive proceeds from a reverse mortgage in equal monthly installments.
- Depending on the particular terms and the borrower’s situation, a tenure plan may or may not be more cost effective than receiving a lump-sum payment.
- A tenure payment plan is best for somebody who desires retirement income and plans to remain in their home, essentially aging in place.
Understanding Tenure Payment Plans
A reverse mortgage is a type of home loan available to homeowners age 62 or older, which is essentially a large home equity loan borrowed against the home’s value. Those using a reverse mortgage can receive funds as a lump sum, a fixed monthly payment, or a line of credit. Unlike a traditional mortgage used to buy a home, a reverse mortgage doesn’t require the homeowner to make any loan payments.
A tenure payment plan is a way to receive reverse mortgage payments in equal monthly sums. This strategy has a lower initial interest rate than a single-disbursement lump-sum payment plan, which is the only fixed-rate option. The tenure plan’s total interest cost could be less over time since the homeowner is borrowing money gradually with a lower initial interest rate. However, it could cost more than the single-disbursement plan, depending on how long the borrower remains in the home and how the adjustable rate changes over time.
The amount of interest owed in the long run usually isn’t a major concern for borrowers who choose the tenure payment plan. Most borrowers using a tenure payment plan are doing so to age in place, and they plan on remaining in their homes for the rest of their lives. Tenure payments offer stability and predictability, so the homeowner does not have to worry about running out of money.
The borrower’s monthly payments under the tenure plan are calculated as if the borrower will live to be 100. Should the borrower live past 100, they will continue receiving payments for life under this payment plan. If the borrower has a shorter life expectancy, then a term payment plan, which provides fixed monthly payments for a set number of years, can allow the homeowner to receive higher monthly payments.
Although they promise safety, tenure payment plans offer a low rate of return when viewed as investments.
Suppose there are two borrowers on the reverse mortgage. In that case, the surviving borrower will continue to receive payments for life under the tenure plan, even after the first borrower dies.
If only one of two homeowners is a reverse mortgage borrower and the borrower dies first, then the surviving homeowner will not receive any further payments since they were not a borrower. This scenario has created problems for some households where an older spouse took out a reverse mortgage in their name only.
Pros and Cons of Tenure Payment Plans
Tenure payment plans allow retirees and others ages 62 and older to enjoy steady income while continuing to live in their homes. By spacing out payments, they also eliminate some of the dangers of having too much free cash available. These include overspending on vacations, being asked to provide a down payment for a child’s mortgage, and even being taken in by scams. Finally, tenure payment plans can also prevent retirees from running out of income if they live longer than expected because they continue receiving payments for life.
A tenure payment plan combines the features of a term payment plan with those of a standard annuity, so it suffers from their drawbacks. Fixed payments sound nice until one considers inflation. Even if a contract provided for inflation adjustments based on the Consumer Price Index (CPI), the local cost of living could still rise faster.
Also, annuities generally promise long-term safety in exchange for low returns. That creates something of a contradiction, because annuities are usually purchased by people with long time horizons.
Interest accrues on monthly payments as the borrower receives them. Another con to consider is that interest also accrues on any financed closing cost, including the up-front mortgage insurance premium and the ongoing monthly mortgage insurance premiums. All of these costs together—monthly tenure payments, interest, closing costs, and mortgage insurance premiums—make up what the borrower owes when a reverse mortgage becomes due and payable.
A tenure payment plan isn’t good for someone who has a large expense that they need to pay all at once or expects to have such an expense in the future. A lump sum, a line of credit, or a payment plan that combines tenure payments with a line of credit might be better options in that scenario.
When do I have to pay back a reverse mortgage?
A reverse mortgage is usually repaid when the borrower dies or decides to move out and sell their home. If you do not keep up payments on your homeowners insurance or property taxes, you also may end up being forced to repay the mortgage sooner.
What fees do reverse mortgages charge?
Reverse mortgages can come with a number of one-time fees and ongoing costs. The most common can include loan origination fees, closing costs, and mortgage insurance premiums.
What is a single-disbursement lump-sum payment?
Borrowers who take out a reverse mortgage and choose a single-disbursement lump-sum payment plan receive all of the proceeds when the loan closes. This payment plan has a fixed interest rate.