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Reverse Mortgages
Types, Shopping and Precautions

 

Reverse Mortgage Types

The three basic types of reverse mortgage are:

  • Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations
  • Home Equity Conversion Mortgages (HECMs), which are federally-insured reverse mortgages backed by the U. S. Department of Housing and Urban Development (HUD)
  • Proprietary reverse mortgages, which are private loans that are backed by the companies that develop them

Single-purpose reverse mortgages generally have very low costs, but they have a number of limitations. They are not available everywhere; they can be used only for one purpose specified by the government or nonprofit lender (such as to pay for home repairs, improvements, or property taxes); and in most cases you must have a low or moderate income to qualify for these loans.

Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages tend to be more costly than other home loans, but they are widely available, have no income or medical requirements, and can be used for any purpose.

Reverse Mortgage Shopping

Reverse mortgages vary according to their costs and terms, so shop around and compare features to find the type best-suited for your needs.

If you want to make a home repair or improvement or need help paying your property taxes, you may want to find out if you qualify for any low-cost single-purpose loans that may be available in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit the Eldercare Locator (or call toll-free, 1-800-677-1116). Ask the AAA for information about available “loan programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs.

If you are interested in a federally-insured HECM, know that all HECM lenders must follow HUD rules, and that many of the loan costs including the interest rate will be the same no matter which lender you select. Still, some costs including the origination fee, other closing costs, and servicing fees may vary among lenders.

If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage. But it generally will cost more. The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information.

No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.

Reverse Mortgage Precautions

Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you do not fully understand what they are selling, or you are not sure you need what they are selling, be even more skeptical. Keep in mind that your total cost would be the cost of what they are selling plus the cost of the reverse mortgage. If you think you need what they are selling, shop around before you buy.

Before considering any reverse mortgage, consult with family members, your attorney, or financial advisor, and be sure to understand the tax consequences of the particular plan you are considering.

No matter why you decide to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing.

The federal Truth in Lending Act (TILA) is one of the best protections you have with a reverse mortgage. TILA requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account.

If you suspect that anyone is violating the law, let the counselor, lender, or loan servicer know. Then, file a complaint with:

  • Your state Attorney General’s office or state banking regulatory agency
  • The Federal Trade Commission (FTC); by phone, toll-free, at 1-877-FTC-HELP (1-877-382-4357)
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