Most retirees who get a reverse mortgage pick the wrong payout structure.

When a reverse mortgage closes, the borrower has to choose how the money comes out. The default is a lump sum, which most loan officers push because it is the simplest conversation. It is also usually the wrong answer.

There are five payout options on a HECM. Picking the right one can change the trajectory of a retirement plan by six figures. Here is the breakdown and where each one fits.

Option 1: Lump sum (least often the right answer)

Take all available funds at closing in a single payout. Useful when there is a specific large expense (paying off a remaining mortgage, funding a major home renovation, buying a second property in cash). The lump sum draws maximum loan balance on day one, which means maximum compounding interest from day one.

When it fits: You have a specific use for the money in the next 90 days and have already exhausted lower-cost alternatives.

When it does not: You "might need it someday." That is the most expensive way to hold money I can show you.

Option 2: Tenure (lifetime monthly payment)

A monthly payment for as long as you live in the home, regardless of how long that is. The payment is calculated on your age and home value and does not change. If you live to 105, the lender keeps paying.

When it fits: Single retiree on a fixed pension with a small Social Security check. The tenure converts home equity into a true second income stream that never runs out.

When it does not: Married couples where one spouse is significantly younger. The payment calculates off the younger spouse's age, which lowers it considerably.

Option 3: Term (monthly payment for a set number of years)

A larger monthly payment than tenure, but only for a specified term (5, 10, 15 years). After the term ends, the line is closed but the loan stays in place.

When it fits: Bridging income between early retirement and a delayed Social Security claim at 70, or between retirement and an inheritance or asset sale that is locked into a specific year.

When it does not: You are not confident about which year the bridge ends.

Option 4: Line of credit (almost always the smartest play)

A growing line of credit you can draw from whenever you want. The unused portion of the line grows at the same rate as the loan interest plus the mortgage insurance premium. Currently about 7.5% annually. That growth is on the AVAILABLE line, not the balance.

A real example. A 68-year-old in Lakeway with a paid-off $750,000 home opens a HECM line of credit with $410,000 available. He draws nothing in year one. By year ten, his available credit has grown to roughly $850,000, and the home is now worth $1.05M (assuming 4% annual appreciation). He has more available borrowing power than he started with, and he has not paid a dime in interest because he has not drawn.

That growth feature does not exist on a traditional HELOC. A HELOC line stays flat or gets cut by the bank in a downturn. A HECM line of credit is contractually guaranteed to keep growing for as long as the loan is open.

Option 5: Modified term or modified tenure

Combines a smaller line of credit with a tenure or term monthly payment. Useful when you want both predictable income AND a safety reserve.

When the line of credit really wins

The line of credit shines as a sequence-of-returns hedge. The standard retirement risk is having to sell investments during a down market early in retirement. If your portfolio drops 25% in year two of retirement and you have to sell to cover living expenses, the math may never recover.

Instead, you draw from the HECM line during the down years, let the portfolio recover, and pay nothing back on the line until you sell the home or pass it to heirs. The line is a non-correlated, non-recourse, contractually-growing reserve. Almost nothing in retirement planning has all three of those properties.

What I steer clients away from

The lump sum, unless there is a specific, time-bound, large expense that justifies it. Even then, I usually push for a smaller lump sum plus a line of credit for the remainder. Anything you do not draw is anything you are not paying interest on, and the unused portion keeps growing whether you use it or not.

Want to walk through your numbers? Talk to Austen.