The biggest benefit of having a reverse mortgage is the ability to receive cash in order to meet your daily living expenses or pay for a major purchase. However, understanding your reverse mortgage payout options and selecting the one that is best for you isn’t always easy. The most popular…reverse mortgage is actually called a Home Equity Conversion Mortgage (or HECM). They are regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA). The federally insured reverse mortgage (HECM) allows seniors 62 and over to structure their loan as a line of credit, a monthly installment, or a lump sum. You can also request a combination of the three.
Understanding Withdrawal Limits
Starting on October 1, 2013, the federal government instituted a cap on the amount of money seniors can withdraw from their reverse mortgages during the first year. The age of the youngest homeowner, as well as the value of your home and the interest rate on your loan, determines the portion of your home value that is made available. Another name for this is the initial principal limit.
In most cases, you can receive up to 60 percent of the initial principal limit the first year you have a reverse mortgage. An exception applies if the amount of money you owe on an existing mortgage or other payments you are required to make is greater than 60 percent of the initial principal limit. In that case, the program allows you to withdrawn enough funds to pay your existing mortgage in full.
You can also receive money to pay upfront loan fees and meet other financial obligations, as long as it is equal to or less than 10 percent of your initial principal limit in additional cash. All three withdrawal options adhere to these regulations.
The Reverse Mortgage Line of Credit Option
If you opt for a line of credit, you have the freedom to draw from your loan whenever you choose. You can also select the disbursement amount that is right for you as long as it doesn’t go over the limits of the first-year cap or your own initial principal limit. You do not have to use the entire credit line and interest only accrues on the amount of money that you do access. Assuming that you continue to meet the requirements of the reverse mortgage program, your line of credit cannot be temporarily frozen or cancelled.
Credit line growth is an added feature of the reverse mortgage line of credit program. This means that you are entitled to a higher credit line the longer you retain your reverse mortgage. If you only take out a small amount upfront, you are free to take out a larger amount later. Credit line growth applies only to the portion of your line of credit that you do not use. This payout method for your reverse mortgage offers the most flexibility of all your choices.
Receiving Your Funds in a Monthly Payout
You have two choices if you prefer to receive a set amount of money from your reverse mortgage every month. With the monthly tenure option, you receive a payment from your lender each month for as long as you remain living in your home and continue to meet all loan requirements.
The term plan also offers you a monthly payout with a slight variation. You still receive a monthly payment, but only for a set number of months. How long you receive the payments is up to you. Because of the shortened amount of time you receive a monthly payout, the amount of your disbursement is higher than it would be with the tenure option. After the term expires, the proceeds (money) from the reverse mortgage stops, but that does not mean that you have to then move from your home. You can certainly remain living in your home as long as you continue to meet your loan requirements (paying property taxes, homeowners insurance, other property charges as well as keeping the home in good repair. If you decide to combine the monthly payout plan with a line of credit, keep in mind that you can only do so if you have an adjustable rate loan.
Fixed Rate, Lump Sum Payouts
If you elect to go with the fixed interest rate option, the money can only be received in one lump sum payout at closing. Your final option for receiving money from your reverse mortgage is to request one lump sum payout. This is at a fixed rate of interest. If you opt to receive your money all at once during the first year of your reverse mortgage, the withdrawal limit applies and you must forfeit the remaining amount. That leaves less available for you to borrow than the line of credit or monthly payment options.
Choosing to Restructure How the Loan Proceeds are Received at a Later Date for the Adjustable Interest Rate Option Only
Circumstances in life change, often times without warning. The choice you make now may not work for you in a few years. The program allows you to re-evaluate your reverse mortgage payout options and make a change if necessary, although you may have to pay a small fee to do so. If you need help deciding on the best course of action, you can ask our expert or speak to your financial advisor.