Consumer Safegurads
Today’s reverse mortgage programs contain numerous safety features to reassure seniors that they retain their rights as the homeowner, and they cannot put themselves, their home, or their family at any financial risk. These protections are mandated by law for the FHA HECM and by Best Practice for conventional programs.
Below is a listing of the most important consumer safeguards:
1) Independent Counseling. Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor. HUD oversees a network of counselors whose job is to review the transaction, answer questions, and suggest alternative options.
2) Standard & Capped Interest Rates
FHA HECM: You can choose either a fixed interest rate or a rate that adjusts monthly or annually (the borrower chooses). Rates are calculated on one of two indexes–the 1-year U.S. Treasury Constant Maturity Rate published weekly by the Federal Reserve, or the London Interbank Offered Rate (LIBOR)–plus a margin charged by the lender. Both the monthly and annually adjusted rates have lifetime caps.
Conventional reverse mortgages. Most conventional programs are based on the LIBOR index, plus a margin charged by the lender.
2) Limitation on Fees. Origination fees are capped 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.
3) Advance Disclosure. Under the FHA HECM program, the Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board, is provided to the prospective reverse 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.
4) No Maturity Date. A reverse mortgage cannot become due during the homeowner’s lifetime. It is a permanent tool. The fact that there are no required payments and there is a lifetime right to occupy the home provides great protection against unforeseen or unanticipated future circumstances, rendering reverse mortgages vastly safer than other loan alternatives.
5) No Prepayment Penalty.
FHA HECM. 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.
Conventional reverse mortgages. Some programs will charge a prepayment penalty if you try to pay off the loan within the first year.
6) No Penalty for Canceling the Loan. After the loan closes, you have up to three days to cancel the transaction, the so-called “right of rescission,” for any reason whatsoever.
7) Asset Protection. What must be paid at the conclusion of the reverse mortgage is the sum of the actual funds received or advanced for fees, plus the accrued interest. In no event will the repayment amount exceed the value of the home, as long as the property is sold to pay back the reverse mortgage. If a decision is made to keep the home, then the pay-off amount would equal the total balance on the account.
No Shared Appreciation. No reverse mortgage product in the marketplace has “equity-sharing” or “shared appreciation” features. In some earlier reverse mortgage products, the senior could obtain more money in exchange for giving up a percentage of the future value of the home. Such products are no longer offered.
Dan Pena OR License # NMLS-202226