What is the difference between a term and tenure award on a reverse mortgage?

As you may know, the reverse mortgage program is very flexible. It is not a “one-size-fits-all” type of product. The options associated with monthly award programs demonstrate this very principle.

The Tenure program is one in which an award is given each month for the remainder of the borrower’s life in the home. Imagine this being very similar to a pension, lifetime annuity or social security award. It is guaranteed for as long as the home remains your primary residence. The award is based off of life expectancy. Typically, lenders will amortize this up until you are 99 years of age. If you happen to live longer, they will continue to honor the agreement and payout.

The Term program also supplements a borrower’s current income, however has a specified date in which the award ceases. The term can be altered to best benefit you; whether it is 5, 8, 13 or 20 years! It is completely up to you how long you would like to supplement you current income.

To best illustrate the differences, let’s take a look at a few examples. *Disclaimer*- All examples are hypothetical. If you’d like to receive an accurate quote, seek the consult of a licensed loan officer. Click here to request a brief consultation.

Tenure Program: Monthly award for as long as a borrower occupies the home. For example, let's look at a couple of scenarios using this program.

Age: 62
Property Value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.524 x $200,000) = $104,800

Given this criteria, a borrower will be eligible for $104,800. Assuming closing costs total around $6,000, the borrower is left with $98,800 in accessible proceeds. With the tenure program, the lender disburses a monthly award to last, at least, the next 37 years. That determined award will be received by the homeowner for as long as the home remains their primary residence.

Let’s look at the same example in which the borrower is now 15 years older:

Age: 77
Home value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.631 x $200,000) = $126,200

Given this criteria, a borrower will be eligible for $126,200. Assuming the closing costs total around $6,000, the borrower is left with $120,200 in accessible proceeds. With the tenure program, the lender disburses a monthly award to last, at least, the next 22 years. That determined award will be received by the homeowner for as long as the home remains their primary residence.

Because the accessible proceeds are greater and the expected lifespan is now shorter, the older borrower will receive a larger monthly award from the lender.

So what might the Term program look like? Let’s review a few scenarios!

Term Program: Monthly award for 20 years. Let's look at some sample scenarios using this program.

Age: 62
Home Value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.524 x $200,000) = $104,800

Given this criteria, a borrower will be eligible for $104,800. Assuming the financing fees total around $6,000*, the borrower is left with $98,800 in accessible proceeds. With the term program, the lender disburses a monthly payment assuming you will receive a monthly award for the next 20 years.

Once the 20 year term has ended, the award will no longer be granted by the lender. Although this benefit has ceased, the homeowner’s only mandatory obligation is to keep current with the property taxes, homeowners insurance and upkeep of the property.

Now let’s review the same scenario in which a borrower is 15 years older

Age: 77
Home value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.631 x $200,000) = $126,200

Given this criteria, a borrower will be qualifying for $126,200. Assuming the financing fees total around $6,000, the borrower is left with $120,200 in accessible proceeds. With the term program, the lender disburses a monthly payment assuming you will receive a monthly award for the next 20 years.

Once the 20 year term has ended, the award will no longer be granted by the lender. Although this benefit has ceased, the homeowner’s only mandatory payment obligations remain keeping current with the property taxes, homeowners insurance and upkeep of the property.

The only reason the older borrower will receive a larger monthly award with a term program is because the initial accessible proceeds are greater. The time-frame of receiving benefits is now exactly the same. (20 years)

So what is to be concluded from this information?

Whether you decide a term or tenure payment is a better fit, both options act as an additional source of income. In some instances, borrowers are very confident they will not live beyond 80. That is why they’d prefer a more sizable, shorter lived, term payment. Others believe they’ll live over 100 years! These are the candidates that gravitate to the tenure program. If the future is less certain, many love the idea of the tenure payment. This option guarantees added security for the rest of one’s life in the home.

HECM Monthly Award Pros:

Additional income source that is non-taxable

As many approach retirement, lifestyle changes are required. Many find themselves not making near the amount of money they once made working. As the cost of living continues to climb, seniors find themselves surviving on a very tight budget. Due to depletion of savings over time, folks begin to tap into other investments or retirement accounts. What people fail to recognize is that money from 401ks or investments are heavily taxed by the government when withdrawn. A reverse mortgage gives you access to funds that are tax free!

Additional security for a spouse

Life is unexpected. As we mentioned previously, the cost of living continues to climb. If a couple is struggling to make ends meet, what happens if one unexpectedly passes? With that loss of income, it puts incredible stress on the surviving spouse to carry on. The last thing anyone wants to be is a burden; especially to their own children. This option is ensuring future income for as long as it remains the primary residence of the survivor.

HECM Monthly Award Cons:

This is an adjustable interest rate program

The HECM monthly award option is an adjustable rate program. Although there are a few protections to ease volatility, the interest rate can increase over time.

The more used today is less left behind tomorrow

As we know, the bank makes their money off interest. Each time money is awarded to the borrower, it increases the balance of the mortgage. The larger the balance becomes, the quicker interest accumulates. Frankly, most borrowers looking into this program are not concerned with the equity left to heirs. To best understand this concept, I’d highly recommend reviewing an amortization schedule. It not only reflects how interest accumulates over time, but also the equity position you are leaving yourself down the road.

If you’d like to receive an accurate quote, seek the consult of a licensed loan officer. Click here to request a brief consultation.

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Frequently Asked Questions

What is a reverse mortgage?

A reverse mortgage is a federally insured product that allows for homeowners, age 62 or older, the ability to access a portion of their home equity in the form of cash. This can be in the form of a lump sum, monthly award or line of credit.

Is the HECM the same as a reverse mortgage?

That is correct! HECM is short for: Home Equity Conversion Mortgage. It is the same program as the federally insured reverse mortgage.

Does the bank take ownership of my home?

Absolutely not! This is merely a mortgage lien. Just like any traditional mortgage product, the title remains in your name.

Is this program only for people who are struggling financially?

Not at all. Although it helps many seniors on fixed incomes live more comfortably, many turn to this option for additional security in retirement.

Will I be leaving my children with debt?

You do not have to! Payments can be made toward a reverse mortgage, just like any other mortgage product. This program gives the borrower much more flexibility regarding repayment options.

If my loan balance is higher than my home value, how are my heirs impacted?

This is a non-recourse loan. This means the home stands alone for the debt, not the homeowner or heirs. It is a concern some share when they do not plan on making any payments toward the reverse mortgage loan over a vast span of years.

Is this loan program insured by the government?

Yes. The reverse mortgage program is regulated by H.U.D. (U.S. Department of Housing and Urban Development) and is insured by the F.H.A. (Federal Housing Administration). These entities set the guidelines lenders must abide by.


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