Term Payment Plan

What Is a Term Payment Plan?

A term payment plan is one of six options in payment plans for receiving the proceeds from a reverse mortgage—also known, if federally insured, as a home equity conversion mortgage (HECM). It provides a homeowner with equal monthly payments for a set period of time. A term payment plan has an adjustable interest rate that changes as the market interest rates change, and interest accrues on monthly payments as the borrower receives them.

Understanding a Term Payment Plan

A reverse mortgage is a mortgage for homeowners who have significant home equity and can borrow against the value of their home to receive monthly payments. This is the opposite of a traditional mortgage, which requires the holder to make loan payments. Reverse mortgages are only available to individuals who are age 62 or older.

A term payment plan involves receiving equal monthly payments over a set period of time, which is decided beforehand. The monthly payments are usually higher than those of a tenure payment plan, because an individual will not receive any further payments once the term payment plan is over. Under a tenure payment plan, the homeowner is allowed to receive payments as long as they continue to live in their home. The payment amount for a tenure plan is calculated assuming that the homeowner will live to be 100 years old.

A term payment plan might be a good option for someone who has a strong idea of how long they plan to stay in a home, such as a homeowner who is older and expects to move to an assisted-living facility in a few years.

Though a reverse mortgage provides monthly funds, there are additional costs to be aware of, including an origination fee, an up-front mortgage insurance premium and ongoing monthly mortgage insurance premiums, any third-party charges (for example, for appraisals, title searches, home inspections, and more), and a lender servicing fee.

In addition, it is important to be aware of the events that can cause a reverse mortgage to become due. These include when the last homeowner on the mortgage dies, if the home is no longer the principal residence of the borrower, and if the property is vacant for medical reasons for more than 12 months (or more than six months for nonmedical reasons).

Disadvantages of a Term Payment Plan

The main drawback of a term payment plan is that once the term ends, there is no way to gain additional reverse mortgage proceeds from the home. This can be a problem if the homeowner doesn’t have any other assets or income.

The borrower can continue living in the home as a principal residence after the end of the payment period as long as they continue to meet other loan conditions, such as keeping up with property taxes, homeowners insurance, and general repairs, but this does not resolve the issue of a possible lack of funds on which to rely.

A term payment plan on a reverse mortgage or, indeed, a reverse mortgage itself is not recommended if an individual is intending to leave their home to beneficiaries once they pass. The loan balance increases on a reverse mortgage, and because you are using home equity, this reduces the value of assets available to leave to your beneficiaries.

If your beneficiaries do inherit your home, they will have to pay off the loan balance, which could be done simply by selling the home. If they want to keep the home, they will have to either use other resources to pay off the loan or refinance the mortgage.

Special Considerations

If there are two homeowners and only one is a borrower on the reverse mortgage, the other homeowner could have problems if the borrower dies first. Should this occur, the surviving homeowner will not receive any further monthly payments, as they are not a borrower.

They may be able to keep living in the home, but that depends on what laws were in effect when the reverse mortgage was taken out. This scenario has created problems for some households in which an older spouse took out a reverse mortgage in their name only.