Term Payment Plan

What Is a Term Payment Plan?

A term payment plan is a type of payment plan for receiving reverse mortgage proceeds that provide a homeowner with equal monthly payments for a set period of time. The term payment plan has an adjustable interest rate that changes as the market interest rates change, and interest accrues on monthly payments as the borrower receives them.

Understanding a Term Payment Plan

A reverse mortgage is a mortgage for homeowners that have significant home equity and can borrow against the value of their home to receive monthly payments. This is the opposite of a traditional mortgage that requires loan payments. Reverse mortgages are only available to individuals that are 62 years of age and older.

A term payment plan involves receiving equal monthly payments over a set period of time, decided beforehand. The monthly payments are higher than a tenure payment plan, but an individual will not receive any further payments once the plan is over. A tenure payment plan assumes that the homeowner will continue living in their home indefinitely and live until they are 100 years old.

A term payment plan might be a good option for someone who has a strong idea of how long they plan to stay in a home, such as a homeowner who is older and expects to move to an assisted-living facility in a few years.

Though a reverse mortgage provides monthly funds, there are additional costs to be aware of, such as the origination fee, the up-front mortgage insurance premium, and the ongoing monthly mortgage insurance premiums.

In addition, it is important to be aware of the events that cause a reverse mortgage to become due. These can include when the last homeowner on the mortgage passes away, if the home is no longer the main residence of the borrower, or if the property is vacant for medical reasons for more than 12 months or for more than six months for non-medical reasons.

Disadvantages of a Term Payment Plan

The main drawback of a term payment plan is that once the term ends, there is no way to gain additional reverse mortgage proceeds from the home, which can be a problem if the homeowner doesn't have any other assets or income.

The borrower can continue living in the home as a principal residence after the end of the payment period as long as they continue to meet other loan conditions, such as keeping up with property taxes, homeowners insurance, and general repairs, but this does not resolve the issue of a possible lack of funds to rely on.

A term payment plan on a reverse mortgage, or a reverse mortgage in general, is not recommended if an individual is intending to leave their home to beneficiaries once they pass. The loan balance increases on a reverse mortgage, and because home equity is used, this reduces the value of assets available to leave to your beneficiaries.

If your beneficiaries do inherit your home then they will have to pay off the loan balance, which might be done simply by selling the home. If they do intend to keep the home, then they can use other resources to pay off the loan or refinance the mortgage.

Special Considerations

If there are two homeowners and only one is a borrower on the reverse mortgage, the other homeowner could have problems if the borrower dies first. Should this occur, the surviving homeowner will not receive any further monthly payments since they are not a borrower.

They may be able to keep living in the home, but that depends on what laws are in effect when the reverse mortgage was taken out. This scenario has created problems for some households where an older spouse took out a reverse mortgage in their name only.