While reverse mortgages are often presented as a reliable source of income for the duration of your lifetime, there is a significant risk of running out of funds sooner than anticipated. A reverse mortgage allows homeowners with substantial home equity to borrow against that value. The choice of a repayment plan can influence how quickly and easily you exhaust your borrowing capacity. There are six different ways to receive reverse mortgage funds:
- Fixed-rate lump sum mortgage payment: This option provides a predetermined interest rate and a one-time payment. Borrowers who solely rely on their home equity and lack alternative sources of income may be tempted to mismanage this large sum. Without careful planning, they may deplete the funds and have no other financial resources to rely on.
- Reverse mortgage line of credit: This payment plan allows borrowers to access funds as needed. It is important to use the line of credit judiciously to avoid running out of money prematurely. The line of credit is irrevocable, meaning it cannot be reduced or canceled due to changes in finances or home value. Unused funds in the line of credit increase over time, providing access to additional funds for the borrower.
- Term reverse mortgage: This option allows borrowers to receive fixed monthly payments for a specific period. Depending on the length of the term chosen, there is a risk of exhausting the funds before the end of the loan term if they are not managed wisely.
- Modified term reverse mortgage: Similar to the term reverse mortgage, this plan offers fixed monthly payments for a specified duration. However, borrowers can also access a line of credit alongside the monthly payments.
- Tenure reverse mortgage: With this plan, borrowers receive fixed monthly payments for as long as they live in the home. The risk of depleting funds prematurely exists if the payments are not managed effectively.
- Altered tenure reverse mortgage: This repayment option combines fixed monthly payments and a line of credit. The unused portion of the line of credit grows over time, providing additional funds.
It is essential to be aware of the risks associated with each repayment plan. To avoid outliving your reverse mortgage funds, consider the following measures:
- Proper planning: Develop a comprehensive financial plan that takes into account your long-term needs and expenses. Consider consulting with a financial advisor or attending reverse mortgage counseling to make informed decisions.
- Responsible borrowing: Be cautious when opting for a lump sum payment, especially if you are younger and have a longer lifespan. Mismanagement of a large sum can lead to financial difficulties in the future.
- Line of credit management: Use the line of credit wisely, keeping in mind that drawing the entire available credit line will leave little to no funds for the future. Repaying some or all of the borrowed amount can increase your principal limit and preserve funds for later use.
- Avoid scams: Taking out a lump sum can make you a target for scammers. Be vigilant and protect your funds from potential fraud or exploitation.
By understanding the various repayment plans and implementing responsible financial strategies, you can reduce the risk of depleting your reverse mortgage funds prematurely and ensure a more secure financial future.
