Tenure Payment Plan

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.

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.

Special Considerations

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.