Term Payment Plan

A term payment plan is an option for receiving reverse mortgage proceeds that gives the homeowner 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. As with all reverse mortgages, interest also accrues on any financed closing costs, such as the origination fee, up-front mortgage insurance premium, third-party fees and the ongoing monthly mortgage insurance premiums. All these costs together – monthly tenure payments, interest, closing costs and MIPs – make up what the borrower owes when the reverse mortgage becomes due and payable.

A term payment plan might be a good option for someone who has a good idea of how long he or she plans to stay in the family home, such as a homeowner who is older and expects to move to an assisted-living facility in a few years. It has a larger monthly payment than a tenure payment plan, which assumes that the homeowner will continue living in the home indefinitely and live until he or she is 100 years old. 

A drawback of the 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. However, the borrower can continue living in the home as a principal residence after the end of the payment period as long as he or she continues to meet other loan conditions, such as keeping up with property taxes, homeowners insurance and general repairs.

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 he or she was not a borrower. He or she may be able to keep living in the home, but it depends on what laws were 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 his or her name only. Reverse Mortgage: Could Your Widow(er) Lose the House? explains the details.