The Home Equity Conversion Mortgage (HECM) program can send you a reverse mortgage loan advance every month. But the amount of this cash payment to you doesn't change over time, so it buys less in the future as prices increase with inflation.
You can choose to have monthly HECM advances paid to you:
• for a specific number of years that you select (a "term" plan); or
• for as long as you live in your home (a "tenure" plan).
A term plan gives you more money each month than a tenure plan does. The shorter the term, the bigger the advances can be. But the advances only run for the amount of time you choose. While you don't have to repay the loan when the term ends, you don't receive monthly checks past the end of the time you select.
Monthly Advance Examples
The HECM program lets you combine a monthly advance with creditline, a lump sum of cash at closing, or some of each. This table shows some of the combinations that could be selected by a 75-year-old Jane Simler living in a $250,000 home with a loan at 7% expected interest, a $35 monthly servicing fee, closing costs of $2,500, and the maximum origination fee allowed by HUD.
HECM Monthly Advance Plus Lump Sums or Creditlines for a 75-Year-Old Borrower Living in a $250,000 Home
|Any combination of a lump sum and a creditline totaling||plus a monthly advance for|
|tenure||15 years||10 years||5 years|
For example, if Jane selects a $25,000 lump sum and a $50,000 creditline, she also could get any one of the following: a monthly advance of $440 for as long as she lives in her home, $557 each month for 15 years, $713 each month for 10 years, or $1,204 monthly for 5 years. This table shows:
• if you take more money as a lump sum or creditline, the monthly advances are smaller; and
• if you select a shorter term of monthly advances, the amount of each advance is bigger.
Monthly Advances Only
The table also shows that you get the largest possible monthly check if you do not take a lump sum or a creditline. The problem? Putting all of your loan funds into a monthly advance reduces your financial flexibility, especially if you don't have much in savings. Remember, monthly advances are fixed. So their purchasing power decreases with inflation.
Adding a growing creditline to your monthly advance gives you a hedge against rising prices and gives you ready cash for unexpected expenses. If you are interested in a monthly advance, it's usually a good idea to add a creditline as well.
On the other hand, for a $20 fee, you can change your payment plan at any time. For example, you could add a creditline to a monthly advance, although this would reduce the amount of the monthly advance. You could also convert part or all of a creditline into a monthly advance.
AARP does not endorse any reverse mortgage lender or product.