The oddly named ‘tenure payment’ is a fixed monthly payment you can get
for as long as you live in your home.
Reverse mortgages have been gaining greater attention from financial planners because they can be incorporated into retirement income plans. One of several strategies enables homeowners to use a reverse mortgage to receive monthly cash flow for life.
A reverse mortgage allows homeowners age 62 and older to tap into home equity by converting a portion of their property’s stored value into cash. These tax-free loan proceeds can be used for any purpose, be it for paying medical bills, covering home repair costs, or using them to shore-up an investment portfolio in years of negative returns and market swings.
“A reverse mortgage certainly wouldn’t be the only asset to depend on during retirement, but it’s a great way to supplement what you may already have.”
“It’s a way to fill in some of the missing gaps retirees might have in their financial plans,” says Larry Hanover, a Chicago-area certified reverse mortgage professional with Reverse Mortgage Funding. “A reverse mortgage certainly wouldn’t be the only asset to depend on during retirement, but it’s a great way to supplement what you may already have.”
Before discussing how a reverse mortgage can be used to guarantee funds for life, consider the basic need-to-know requirements and qualifications.
Home Equity Conversion Mortgages (HECMs) represent most of the reverse mortgages found on the market today. These loans, which are insured by the Federal Housing Administration, differ from a traditional mortgage in the sense that rather than making monthly payments to a lender, a HECM reverse mortgage borrower instead receives money from the lender.
With a reverse mortgage, you are essentially borrowing against your home equity. The money borrowers receive from a reverse mortgage represents the loan balance, which increases over the life of the loan. Borrowers are not required to repay the loan until the home is sold or otherwise vacated.
It is important to note that borrowers are required to remain current on property taxes and homeowner’s insurance associated with their residence. When qualifying for a reverse mortgage, a lender will conduct a financial assessment to ensure you have the capacity to afford these ongoing taxes and insurance obligations.
Now onto the good stuff: receiving payment from a reverse mortgage.
The loan amount qualified borrowers are eligible to receive depends on several factors, including their age, the appraised value of their home, interest rates, upfront costs and, in the case of couples, the age of the younger spouse.
“Similar to an annuity, tenure payments provide guaranteed payment through the end of a borrower’s life…”
Borrowers can choose to access their home equity through several payment options, including a single lump sum payout, a line of credit, a term payment that pays out monthly fixed installments for a specified period of time, or a tenure payment, which provides borrowers with fixed monthly payments for as long as they live in the home.
Similar to an annuity, tenure payments provide guaranteed payment through the end of a borrower’s life, provided they continue to remain living in the home secured by their reverse mortgage. These payments only stop when you die or permanently vacate the property. This particular feature can be a good choice for borrowers who want to have peace of mind knowing they will continue to receive funds as long as they live.
“Tenure payments are going to give them the security of knowing they will receive ‘X’ amount of dollars per month, every month for as long as they live in the house,” says Hanover.
Reverse mortgages are non-recourse loans, meaning borrowers can never owe more than the value of their home at the time the reverse mortgage becomes due and payable. The loan is due when the borrower either dies or decides to sell the home. The non-recourse provision also mandates that the reverse mortgage debt may be satisfied by paying the lesser of the mortgage balance, or 95% of the current appraised value of the home.
Because of this provision, borrowers have the potential to borrow more than their home’s value, which could happen if you took a reverse mortgage tenure option at age 62 and ended up living a long life.
“As long as you live in the house payment doesn’t end,” says Hanover. “So if you took a tenure payment at age 62 and lived to be 102, you made a good decision.”
While reverse mortgages can benefit retirees by helping them age in place and access some extra funds during retirement, they are complex financial products. As such, they require reliable information to make an informed decision. The required reverse mortgage counseling ensures all borrowers will have the needed information.
When used well, a reverse mortgage can help retired homeowners remain living in their homes while also receiving some extra cash flow — money they can choose to spend however they like during retirement. But these loans aren’t for everybody and they don’t provide a one-size-fits-all solution. Before moving forward with a reverse mortgage, there are several important considerations to take into account.
First and foremost, prospective borrowers should think about how long they plan to live in their home. If you plan to stay in the house for more than a few years, then a reverse mortgage might be something to consider, says Hanover.
You will also have to consider whether or not your current home is well-equipped and accessible to meet your needs in the event you become less mobile. Of course, money from a reverse mortgage can be used to make such renovations, including the installation of access ramps, grab bars or other accessibility features.
It is also worth knowing that if you do plan to move or downsize into a smaller, more manageable residence, a product known as the HECM for Purchase allows retirees age 62 and older to buy a new home and obtain a reverse mortgage on it in a single transaction.
“For the Baby Boomer generation, to have a product that protects your retirement portfolio, ensures you can stay in the home and neighborhood you enjoy, and can access home equity in a tax advantageous way—there’s nothing like it,” says Hanover.
If you are nearing retirement and would like to know more about how much you can qualify to borrow with a reverse mortgage, use our calculator to find out more.
