Single-Disbursement Lump-Sum Payment Plan

What Is a Single-Disbursement Lump-Sum Payment Plan?

A single-disbursement lump-sum payment plan allows the borrower to receive all reverse mortgage proceeds as a large amount of money when the loan closes. That means there are no monthly disbursements or other additional proceeds later. The single-disbursement lump-sum payment plan has a single fixed interest rate.

Interest accrues on the amount of the lump sum and financed closing costs. Where applicable, costs also include the upfront mortgage insurance (UFMI) premium and the ongoing monthly mortgage insurance premiums. Together, all of these costs compose the amount that the borrower owes when the reverse mortgage becomes due and payable.

Understanding Single-Disbursement Lump-Sum Payment Plans

The single-disbursement lump-sum payment plan has a higher interest rate than plans that have adjustable rates. This scenario is similar to a borrower's first mortgage. If the borrower selects an adjustable rate, the initial rate will be lower. However, the amount they will owe is uncertain. If the borrower chooses a fixed-rate mortgage, the initial rate will be higher, but the borrower will know their total borrowing costs in advance.

The single-disbursement plan can be a good option for borrowers who need to pay for a large expense and do not expect to need more money later. Funds can be used to pay off a high balance on a first mortgage. Homeowners who want to receive regular monthly payments (or who want the option to borrow as needed) should choose a different option. They could be better off with term payments, tenure payments, a line of credit, or a combination of term or tenure payments with a line of credit.

Borrowers who have not demonstrated an ability to manage a large sum wisely are also poor candidates for the single-disbursement plan. Furthermore, some criminals seeking to defraud seniors have used the single-disbursement plan to steal large sums in a single transaction.

You can avoid fraud by starting the reverse mortgage process with well-known websites, banks, financial advisors, and other trusted sources. Beware of calls and emails promoting exclusive offers that sound too good to be true.

Another drawback of the single-disbursement lump-sum option comes from a regulation implemented in 2013. The homeowner can only borrow 60% of the initial principal limit in the first year of the loan. That means the maximum amount available with a single-disbursement lump-sum payment plan is lower than many other plans.

Of course, the borrower could potentially change payment plans to borrow more. If interest rates have increased significantly since the loan began, then the borrower might receive less money than expected by switching payment plans.

Benefits of Single-Disbursement Lump-Sum Payment Plans

The greatest advantage of a single-disbursement lump-sum payment plan is the ability to get a large sum of money all at once. In some cases, people need money for medical expenses or some other emergency. However, it might be better to get a single-purpose reverse mortgage if borrowers need funds for the property itself. Extensive repairs or remodeling for the house are in the lender's interest, so better rates and terms might be available.

The other benefit of a single-disbursement lump-sum payment plan is locking in a fixed interest rate. When interest rates are low, as they were in 2020, it often makes sense to go with a fixed rate where possible. As a rule, interest rates move quite slowly over long cycles.

Rates in the United States mostly declined between 1920 and 1940, before generally rising between 1940 and 1980. After 1980, interest rates usually fell, but they then reached such a low point that future increases seemed more likely.

Criticism of Single-Disbursement Lump-Sum Payment Plans

Perhaps the largest drawback of single-disbursement lump-sum payments is that having so much money around can lead to waste, fraud, and abuse. That is particularly true when people never had so much cash before. Consider a couple that put most of their savings into a home that is now worth $300,000. With a 60% single-disbursement lump-sum payment, they would have $180,000 in cash (minus closing and other costs). That might be much more than they are accustomed to having.

The temptation to waste money is perhaps the least of the issues with single-disbursement lump-sum payments. Retirees may fritter away their life savings on vacations and other luxuries. On the other hand, people might simply want to enjoy their money while they still can. A tenure payment plan might be better for people worried about running out of money in old age.

Reverse mortgage scams and other forms of fraud can be much more serious. Term payment plans are less vulnerable to fraud because they spread payments out. That gives victims more time to catch on, and less damage occurs.

Finally, single-disbursement lump-sum payments open up seniors to abuse their generosity by friends and relatives. Requests for loans and even expectations of gifts are likely to increase when available cash rises dramatically.