A HECM modified term plan is simply the combination of a term income plan and a line of credit.
A modified term plan is only offered by the variable-rate HECM. The fixed-rate HECM offers only the lump sum payout option.
The term portion of this plan distributes proceeds in the form of a monthly paycheck guaranteed to last for a set period of time. Term payments aren’t guaranteed for life like tenure payments, so there’s a risk they could run out at some point.
The advantage of a modified term plan is that you have more flexibility to set the exact payment or length of time you would like the payments to come in. Tenure payments, on the other hand, are calculated based on a set formula you don’t have any power to change.
Tenure payments tend to be lower than term payments because they come with a lifetime guarantee.
How the line of credit works
The line of credit portion of the plan works very similarly to a home equity line of credit (HELOC). The available credit can be borrowed and repaid on a revolving basis and interest accrues only on what you borrow.
One of the best features of a HECM line of credit is growth, which gives you access to more money automatically based on a guaranteed annual growth rate. Because of this growth, the line of credit can essentially turn a chunk of the value of your home into a liquid retirement account/emergency fund that will increase in value over time. As long as you uphold your end of the bargain (live in the home and pay required property charges), the available line of credit will grow and compound with no limit.
As an example, let’s assume you qualify for a line of credit that starts at $150,000 and has a growth rate of 5%. If you don’t pull out any money, the line of credit will grow to $157,500 after just the first year. If you leave it alone for 5 years, the line of credit will grow to $191,442.23 (assuming the growth rate doesn’t change). As you can see, this can turn an asset that does largely nothing for you – your equity – into a liquid asset that grows and appreciates and can help fund your retirement lifestyle.
What if you borrow more than your home is worth?
If you end up borrowing more than the value of your home, you’re fully protected. The HECM is a non-recourse loan. The most that will ever have to be repaid is the value of the home. Any shortage is paid off by the FHA mutual mortgage insurance fund.
A modified term plan is a great income option
A HECM modified term income plan is a great way to set up a backup/emergency fund and get extra monthly income for a set dollar amount or period of time. Many seniors use term income on a temporary basis to until another income source kicks in or they can qualify for Medicare.
Even better, whatever you don’t use in the line of credit will grow and compound over time based on a growth rate. This gives you access to additional reserves in the future automatically.
Picking the right payment plan, whether term, modified term, or tenure, can seem a little daunting. Nobody can predict what the future holds or what your future financial needs will be. But, the good news is that the HECM can change with your financial needs. If you find you need to restructure your income plan in the future, you can do that with a quick phone call to your lender.