Tenure Payment Plan

What Is a Tenure Payment Plan?

A tenure payment plan (or annuity plan) is a way to receive reverse mortgage proceeds where the borrowers get equal monthly payments for as long as they live in the home. The tenure payment plan has an adjustable interest rate. Interest accrues on monthly payments as the borrower receives them. Interest also accrues on any financed closing cost, including the upfront mortgage insurance premium and the ongoing monthly mortgage insurance premiums.

All of these costs together — monthly tenure payments, interest, closing costs, and mortgage insurance premiums — make up what the borrower owes when the reverse mortgage becomes due and payable.

Understanding Tenure Payment Plans

A reverse mortgage is a type of home loan available to homeowners aged 62 or older, which is essentially a large home equity loan borrowed against their home's value. Those using a reverse mortgage can receive funds either as a lump sum, fixed monthly payment, or line of credit. Unlike a traditional mortgage used to buy a home, a reverse mortgage doesn’t require the homeowner to make any loan payments.

A tenure payment plan is a way to receive reverse mortgage payments in equal monthly sums. This strategy has a lower initial interest rate than the single-disbursement lump-sum payment plan, which is the only fixed-rate option. The tenure plan's total interest cost could be less over time since the homeowner is borrowing money gradually with a lower initial interest rate. However, it could cost more than the single-disbursement plan, depending on how long the borrower remains in the home and how the adjustable rate changes over time.

The amount of interest owed in the long run usually isn't a major concern for borrowers who choose the tenure payment plan. Most borrowers using a tenure payment plan are doing it so they can age in place, and they plan on remaining in their homes for the rest of their lives. Tenure payments offer stability and predictability, so the homeowner does not have to worry about running out of money.

This payment plan isn't good for someone who has a large expense he or she needs to pay all at once or expects to have such an expense in the future. A lump sum, a line of credit, or a payment plan that combines tenure payments with a line of credit might be better options in that scenario.

The borrower's monthly payments under the tenure plan are calculated as if the borrower will live to be 100. Suppose the borrower has a shorter life expectancy. In that case, a term payment plan, which provides fixed monthly payments for a set number of years, can allow the homeowner to receive higher monthly payments. If the borrower lives past 100, he or she will continue receiving payments for life under the tenure payment plan.

Although they promise safety, tenure payment plans offer a low rate of return when viewed as investments.

Special Considerations

Suppose there are two borrowers on the reverse mortgage. In that case, the surviving borrower will continue to receive payments for life under the tenure plan, even after the first borrower dies.

However, suppose only one of two homeowners is a reverse mortgage borrower, and the borrower dies first. Then, the surviving homeowner will not receive any further payments since he or she was not a borrower. This scenario has created problems for some households where an older spouse took out a reverse mortgage in his or her name only.

Benefits of Tenure Payment Plans

Firstly, tenure payment plans allow retirees and others over 62 to enjoy higher incomes while continuing to live in their houses. By spacing out payments, they also eliminate some of the dangers of having too much free cash available. These include overspending on vacations, being asked to provide a down payment for a child's mortgage, and even being taken in by scams. Finally, tenure payment plans can also prevent retirees from running out of income if they live longer than expected because they continue receiving payments for life.

Criticism of Tenure Payment Plans

A tenure payment plan combines the features of a term payment plan with those of a standard annuity, so it suffers from their drawbacks. Fixed payments sound nice until one considers inflation. Even if a contract provided for inflation adjustments based on the consumer price index (CPI), the local cost of living could still rise faster. Depending on the house and the people living there, it could make more sense to rent out a room instead. That way, rents could be raised to keep pace with a higher cost of living in the neighborhood.

Annuities generally promise long-term safety in exchange for low returns. That creates something of a contradiction because annuities are usually purchased by people with long time horizons. People who are 65 and worried about where their finances will be in 20 or 30 years can invest some money in a stock index fund. That usually gives stocks enough time to produce large gains. Tenure payment plans have even more issues in this regard because very few people make it to 100. It might be better to use a term payment plan instead, then add stocks or even an annuity to it.