Key Takeaways
- A term payment plan gives you fixed monthly checks for a set number of years.
- The monthly payout is significantly higher than a lifetime tenure payment.
- It is ideal for bridging the gap until a pension or Social Security kicks in.
\n\nWhile the lifetime guarantee of a Tenure Payment plan is comforting, it often results in a relatively small monthly check because the lender assumes you will live to 100.
But what if you don't need income for the rest of your life? What if you only need extra cash for the next five years until your spouse's pension kicks in, or until you reach age 70 and can claim maximum Social Security benefits?
In these scenarios, the Term Payment Plan is the perfect financial bridge.
How the Term Payment Works
With a term payment, you tell the reverse mortgage lender exactly how many months or years you want to receive payments.
Because the lender is spreading your available equity over a much shorter time horizon (e.g., 5 years instead of 35 years), the monthly checks will be substantially larger.
A Mathematical Example
Assume you have $100,000 in available equity to draw from. - Tenure Plan (Lifetime): The lender might offer you $500 a month for life. - Term Plan (5 Years): The lender might offer you $1,600 a month for exactly 60 months.
Bridging the Retirement Gap
The most common use of the term payment is bridging the "Social Security Gap."
Many seniors are forced to retire at 62 due to health or job loss. If they claim Social Security at 62, their monthly benefit is permanently reduced by up to 30%. If they wait until age 70 to claim, their benefit is maximized.
A senior can use a 8-year Term Payment from a reverse mortgage to replace their income from age 62 to 70. Once they turn 70, the reverse mortgage payments stop, but they simultaneously switch on their maximized Social Security benefits for the rest of their life.
The Risk of the Term Plan
The danger of a term payment is obvious: The payments stop.
If you set up a 10-year term payment, on month 121, the checks will cease completely. If you have not planned accordingly, you will suddenly face a massive drop in monthly income.
However, you will still be allowed to live in the home for the rest of your life (provided you pay taxes and insurance). You do not have to move out just because the term payments ended. The loan balance simply sits and compounds interest until you eventually pass away or sell the property.\n