Tenure Payment Plan

What is 'Tenure Payment Plan'

A tenure payment plan is a way to receive reverse mortgage proceeds where the borrower gets equal monthly payments for as long as he or she lives in the home as a primary residence. The tenure payment plan has an adjustable interest rate. Interest accrues on monthly payments as the borrower receives them. Interest also accrues on any financed closing costs (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 (MIPs)—make up what the borrower owes when the reverse mortgage becomes due and payable.

BREAKING DOWN 'Tenure Payment Plan'

The tenure payment plan has a lower initial interest rate than the 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 and the initial interest rate is lower. However, it could also be more over time than it would be with the single disbursement plan, depending on how long the borrower remains in the home and how the adjustable rate changes over time compared with the fixed rate the borrower could have gotten on the lump sum.

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 in order to age in place, and plan on remaining in their homes for the rest of their lives. Tenure payments offer stability and predictability and mean that the homeowner does not have to worry about running out of money. This payment plan isn’t good for someone who has a large expense they need to pay all at once, or who 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.

The borrower’s monthly payments under the tenure plan are calculated as if the borrower will live to be 100. If the borrower has a shorter life expectancy, a term payment plan, which provides fixed monthly payments for a set number of years, can allow the homeowner to receive higher monthly payments. If the borrower lives past 100, he or she will continue receiving payments for life under the tenure payment plan.

If there are two borrowers on the reverse mortgage, the surviving borrower will continue to receive payments for life under the tenure plan even after the first borrower passes away. However, if there are two homeowners, only one of which is a reverse mortgage borrower and that homeowner passes away first, the surviving homeowner will not receive any further payments since he or she was not a borrower. This scenario has created problems for some households where an older spouse took out a reverse mortgage in his or her name only.