What Is a Tenure Payment Plan?
A tenure payment plan (or annuity 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 cost, including the upfront 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 the reverse mortgage becomes due and payable.
- A tenure payment plan is a strategy for collecting proceeds from a reverse mortgage in equal monthly installments.
- Reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.
- Depending on the particular terms and borrower situation, a tenure plan may or may not be more cost-effective than receiving a lump-sum payment.
- A tenure payment plan is best suited for somebody who desires retirement income where they can remain in their home, but do not intend to bequeath the home after death.
Understanding Tenure Payment Plans
A reverse mortgage is a type of home loan available to homeowners aged 62 or older, which is essentially a large home equity loan borrowed against the value of their home. Those using a reverse mortgage can receive funds either as a lump sum, fixed monthly payment, or 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 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 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 it so they can 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. This payment plan isn’t good for someone who has a large expense he or she needs 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.
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 dies. However, if only one of two homeowners is a reverse mortgage borrower, and the borrower dies 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.