One of the common questions I'm asked is: How can (should) a reverse mortgage be set up to provide income? While there are many options for reverse mortgages, in this article I want to outline one particular strategy, referred to as a “tenure” payment. When we hear “tenure”, we naturally think of things like a tenured professor, or someone's term in a particular position. In the case of reverse mortgages, a tenure payment program refers to the term of payments to the homeowner for the life of the owner, while they live in the home. Tenure payments are generally structured as monthly payments to the owner. This may sound a bit like an annuity (a payment for life). It's close, but not exactly the same. One difference is that tenure payments are received only while you are living in the home. Commonly, annuity payments continues as long as you live, regardless of where you live. In the case of a reverse mortgage, if you leave your home the loan will typically need to be repaid at that time. Recall that the lender has provided this loan based on the fact the home is your primary residence.
There's another difference. Many annuities stop payments when you die. Regardless of how much money you paid for the annuity, the payments stop and the insurance company keeps the rest of your money. A tenure payment program will stop as well if you die. But, the amount of the loan also stops. Which means your home, when sold, has only to pay off the loan amount plus any accrued interest and your heirs keep the rest of the sale proceeds.
Finally, there is a difference in how a reverse mortgage and an annuity are funded. To fund an annuity, we transfer money to an insurance company to buy the annuity. That's money we have ready at our disposal, such as from savings or IRA accounts. In the case of a reverse mortgage, we don't give anyone money directly. Rather, we sign a contract with a bank or some other lending institution for a specific amount of money to be provided to us, with our home as the collateral. The bank will receive payment for the loan once the house is sold or no longer occupied by the owner. The loan accrues interest just like any other loan. But, unlike most other loans, the amount due on the loan can never exceed the sale value of the house. They term this a “non-recourse” loan. The bank has no other recourse if the funds from the sale do not satisfy the loan.
Why do I draw your attention to the tenure payment program? Because there are those that have directed their income towards a highly valued home, but in doing so may have contributed less to savings or retirement accounts. Having invested so much in their home, they want very much to live there for a significant time in retirement. With less money saved in conventional accounts, the tenure payment program is an excellent option to turn their home equity into a needed income stream during retirement.
I want to re-emphasize a couple of important points for reverse mortgages. You continue to own your home. The reverse mortgage merely serves as a loan that is paid off when the home is either sold or upon death of the homeowner. You decide how long to stay in your home or when to sell it. The bank can never call the loan and demand you move. If you relocate or die, the bank’s sole recourse for the amount loaned to you is repayment of the loan from the sale of the house proceeds. Most commonly, the value of the property exceeds the amount due on the loan. Therefore, you or your heirs retain the rest of the proceeds from the sale.
There's likely a lot of questions you have in regard to this idea. I'll be glad to talk with you to see if this makes sense for you. Just call or email me.