Reverse Annuity Mortgage
A “reverse annuity mortgage” may seem strange to the ears, and in fact most people are familiar instead with annuities outside the realm of mortgages. An annuity is generally defined as a fixed sum of money paid to someone each year, sometimes for the rest of their life. This might be from an investment or a kind of insurance that would entitle the investor to annual payments. It might be the result of a court settlement, where the litigant is scheduled to receive a lump sum payment or a series of annual payments. A lottery winner might also choose to receive the winnings in the form of an annuity.
A reverse mortgage can function like these examples, where the borrower is set up to receive a certain sum regularly over time. Whereas a regular “forward” mortgage starts with the borrower paying the lender a set sum on a monthly basis and ends with a zero balance, a reverse mortgage starts with the borrower receiving money from the lender, makes no monthly payments, and ends with a balance higher than the original balance. A reverse mortgage is only available to seniors age 62 and older, on the home in which they reside.
The way in which the borrower receives the money in a reverse mortgage can vary. There are four options:
- Lump sum with a fixed rate
- Line of credit with a variable rate
- Tenure (monthly) payment with a variable rate
- A combination of 2 and 3.
A “reverse annuity mortgage” is describing a situation where the borrower is receiving tenure payments, either as the sole type of payment, or in combination with a line of credit. Let’s say the client has no mortgage to pay off and has no pressing major needs, but would like to supplement their monthly income. They can set up the reverse mortgage as a tenure, a monthly payment. This payment will be a fixed amount, and can be for the rest of their life. They can choose to receive this payment instead for a fixed period of time, like 15 years, in which case the amount will be somewhat larger than it would be for the indefinite lifetime annuity.
Sometimes the borrower will want the tenure option, but still has an immediate need for a larger sum, but not so large as to require the lump sum payment. Maybe they want to pay off a grandchild’s $50,000 college debt. If so, they can set up a line of credit for the $50K and receive the rest of what they are entitled to via the monthly payments, thus combining those options.
Because of the nature of the annuity as spreading out over a long and often indefinite period of time, the amount the borrower will receive will be less than with either the fixed rate lump sum or the variable rate line of credit options. An advantage of the annuity (tenure) option is that the balance of the mortgage goes up more slowly than the lump sum option, but then the lump sum offers more money and a fixed rate. Each borrower needs to decide which option suits their situation best.