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Understanding Reverse Mortgages

Consumer Safeguards

Broader understanding of these consumer protection features is the reason why there is now a wider acceptance of reverse mortgages. Although all reverse mortgage products available in the marketplace work similarly, the most popular program is the Home Equity Conversion Mortgage, or HECM, administered through the U.S. Department of Housing and Urban Development (HUD). Among HECM’s consumer safeguards are several important features:

Standard & Capped Interest Rates: The interest rate is the same no matter which lender a senior chooses. On HECM, interest rates are adjusted both monthly or annually (the borrower chooses) and are based on an index called the one-year U.S. Treasury Constant Maturity Rate published weekly by the Federal Reserve. Both the monthly and annually adjusted rates have lifetime caps. On other products, different indexes are used.

Limitation on Fees: Origination fees are limited by HUD regulations and may be financed as part of the reverse mortgage. This means a senior incurs very little out-of-pocket expense to get a reverse mortgage.

Advance Disclosure: The Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board is provided to the prospective mortgage borrower and displays the total transaction costs over the projected life of the loan. This way, a senior is made fully aware of the costs incurred in obtaining the reverse mortgage.

Independent Counseling: Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor.

No maturity date: A reverse mortgage cannot become due during the homeowner’s lifetime.

No Prepayment Penalty: Although the loan is not due and payable until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.

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