The Reverse Mortgage tenure payout option is the most conservative of the options available to seniors looking at the Home Equity Conversion Mortgage (HECM) program. The tenure payout option is a fixed monthly payment that is paid by the lender or bank to the reverse mortgage borrower for the time that the homeowner resides at the property. Typically, the only time that the borrower would have to pay back the loan is when the borrower sells the home, moves out permanently or passes away.
The tenure payout continues monthly no matter if the borrower outlives the value of the property, meaning if the loan balance is greater than the value of the home, the homeowner continues to receive monthly payments. Essentially, the homeowner turns the equity in their property into a lifetime annuity. The reason why this option is so secure and predictable is that the Federal Housing Administration (FHA) insures the loan against default and if the loan balance grows bigger than the market value of the home.
This payout option is conservative because it is hard to outlive the market value of your home. For example, your home value is $200,000, you are 70 years old and take out a reverse mortgage with a tenure payout option. You would receive roughly $700 a month, tax-free, for the rest of your life, if you decide to remain in the home as such. If the balance is zero at the beginning, in 10 years you would have a loan balance roughly $130,000, but remember that typically the value of your home grows as well. So at an estimated 3% year appreciation, your home, in 10 years, would be worth around $268,000. And after 20 years the value of your home would be worth around $361,000 and your balance would be $339,000. So in 20 years based on this scenario, you would be 90 years old and still would not have outlived the balance of the loan.
That’s why the reverse mortgage tenure payout option is so conservative. It is a lot harder to outlive the value of your home because the home continues to appreciate in value. But also remember that because the FHA insures the reverse mortgage loan, even if you did outlive the value vs the balance of the home, the lender would continue to make monthly payouts to you. And even when you pass away, your heirs would not be responsible for any balance greater than the value of the home, after the sale of the property, FHA would be on the hook for that difference.