Reverse Mortgages:
Get the Facts Before Cashing in on Your Home’s Equity
I
f you’re 62 or older – and looking for money
to nance a home improvement, pay o your
current mortgage, supplement your retirement
income, or pay for healthcare expenses – you may
be considering a reverse mortgage. It’s a product
that allows you to convert part of the equity in your
home into cash without having to sell your home or
pay additional monthly bills.
e Federal Trade Commission (FTC), the
nation’s consumer protection agency, wants you to
understand how reverse mortgages work, the types of
reverse mortgages available, and
how to get the best deal.
In a “regular” mortgage, you
make monthly payments to the
lender. In a “reverse” mortgage,
you receive money from the
lender, and generally don’t have
to pay it back for as long as you
live in your home. e loan is
repaid when you die, sell your
home, or when your home is no longer your primary
residence. e proceeds of a reverse mortgage
generally are tax-free, and many reverse mortgages
have no income restrictions.
Types of Reverse
Mortgages
ere are three types of reverse mortgages:
■ single-purpose reverse mortgages, oered by
some state and local government agencies and
nonprot organizations
■ federally-insured reverse mortgages, known as
Home Equity Conversion Mortgages (HECMs)
and backed by the U. S. Department of Housing
and Urban Development (HUD)
■ proprietary reverse mortgages,
private loans that are backed
by the companies that develop
them.
■ Single-purpose reverse
mortgages are the least
expensive option. ey are not
available everywhere and can
be used for only one purpose,
which is specied by the
government or nonprot lender. For example,
the lender might say the loan may be used only
to pay for home repairs, improvements, or
property taxes. Most homeowners with low or
moderate income can qualify for these loans.
March 2011
In a reverse mortgage, you
receive money om the
lender, and generally don’t
have to pay it back for as long
as you live in your home.
■ HECMs and proprietary reverse mortgages
may be more expensive than traditional home
loans, and the upfront costs can be high. at’s
important to consider, especially if you plan
to stay in your home for just a short time or
borrow a small amount. HECM loans are
widely available, have no income or medical
requirements, and can be used for any purpose.
Before applying for a HECM, you must meet with
a counselor from an independent government-
approved housing counseling agency. Some lenders
oering proprietary reverse mortgages also require
counseling. e counselor is required to explain
the loan’s costs and nancial implications, and
possible alternatives to a HECM, like government
and nonprot programs or a single-purpose or
proprietary reverse mortgage. e counselor also
should be able to help you compare the costs of
dierent types of reverse mortgages and tell you
how dierent payment
options, fees, and other
costs aect the total cost
of the loan over time.
To nd a counselor, visit
www.hud.gov/oces/hsg/
sfh/hecm/hecmlist.cfm or
call 1-800-569-4287. Most
counseling agencies charge
around $125 for their services. e fee can be paid
from the loan proceeds, but you cannot be turned
away if you can’t aord the fee.
How much you can borrow with a HECM or
proprietary reverse mortgage depends on several
factors, including your age, the type of reverse
mortgage you select, the appraised value of your
home, and current interest rates. In general, the
older you are, the more equity you have in your
home, and the less you owe on it, the more money
you can get.
e HECM lets you choose among several payment
options. You can select:
■ a “term” option – xed monthly cash advances
for a specic time.
■ a “tenure” option – xed monthly cash advances
for as long as you live in your home.
■ a line of credit that lets you draw down the loan
proceeds at any time in amounts you choose
until you have used up the line of credit.
■ a combination of monthly payments and a line
of credit.
You can change your payment option any time for
about $20.
HECMs generally provide
bigger loan advances at a lower
total cost compared with
proprietary loans. But if you
own a higher-valued home,
you may get a bigger loan
advance from a proprietary
reverse mortgage. So if your
home has a higher appraised
value and you have a small mortgage, you may
qualify for more funds.
Loan Features
Reverse mortgage loan advances are not taxable,
and generally don’t aect your Social Security or
Medicare benets. You retain the title to your home,
and you don’t have to make monthly repayments.
e loan must be repaid when the last surviving
HECM loans are widely available,
have no income or medical
requirements, and can be used for
any purpose.
FTC Facts For Consumers 2
borrower dies, sells the home, or no longer lives in
the home as a principal residence.
In the HECM program, a borrower can live in a
nursing home or other medical facility for up to 12
consecutive months before the loan must be repaid.
If you’re considering a reverse mortgage, be aware that:
■ Lenders generally
charge an origination
fee, a mortgage
insurance premium
(for federally-insured
HECMs), and other
closing costs for a
reverse mortgage.
Lenders also may charge servicing fees during the
term of the mortgage. e lender sometimes sets
these fees and costs, although origination fees for
HECM reverse mortgages currently are dictated
by law. Your upfront costs can be lowered if
you borrow a smaller amount through a reverse
mortgage product called a “HECM Saver.”
■ e amount you owe on a reverse mortgage
grows over time. Interest is charged on the
outstanding balance and added to the amount
you owe each month. at means your total debt
increases as the loan funds are advanced to you
and interest on the loan accrues.
■ Although some reverse mortgages have xed
rates, most have variable rates that are tied to a
nancial index: they are likely to change with
market conditions.
■ Reverse mortgages can use up all or some of the
equity in your home, and leave fewer assets for
you and your heirs. Most reverse mortgages have
a “nonrecourse” clause, which prevents you or
your estate from owing more than the value of
your home when the loan becomes due and the
home is sold. However, if you or your heirs want
to retain ownership of the home, you usually
must repay the loan in full – even if the loan
balance is greater than
the value of the home.
■ Because you retain
title to your home,
you are responsible
for property taxes,
insurance, utilities,
fuel, maintenance, and
other expenses. If you don’t pay property taxes,
carry homeowner’s insurance, or maintain the
condition of your home, your loan may become
due and payable.
■ Interest on reverse mortgages is not deductible
on income tax returns until the loan is paid o
in part or whole.
Getting a Good Deal
If you’re considering a reverse mortgage, shop
around. Compare your options and the terms
various lenders oer. Learn as much as you can about
reverse mortgages before you talk to a counselor or
lender. at can help inform the questions you ask
that could lead to a better deal.
■ If you want to make a home repair or
improvement – or you need help paying your
property taxes – nd out if you qualify for any
low-cost single-purpose loans in your area. Area
Agencies on Aging (AAAs) generally know about
these programs. To nd the nearest agency, visit
Reverse mortgage loan advances are not
taxable, and generally don’t aect your
Social Security or Medicare benets.
FTC Facts For Consumers 3
www.eldercare.gov or call 1-800-677-1116. Ask
about “loan or grant programs for home repairs
or improvements,” or “property tax deferral” or
“property tax postponement” programs, and how
to apply.
■ All HECM lenders must follow HUD rules.
And while the mortgage insurance premium
is the same from lender to lender, most loan
costs, including the origination fee, interest
rate, closing costs, and servicing fees vary
among lenders.
■ If you live in a higher-
valued home, you may
be able to borrow more
with a proprietary reverse
mortgage, but the more
you borrow, the higher
your costs. e best way
to see key dierences
between a HECM and a proprietary loan is
to do a side-by-side comparison of costs and
benets. Many HECM counselors and lenders
can give you this important information.
■ No matter what type of reverse mortgage you’re
considering, 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: they show
the projected annual average cost of a reverse
mortgage, including all the itemized costs.
Be Wary of Sales Pitches
Some sellers may oer you goods or services, like
home improvement services, and then suggest that
a reverse mortgage would be an easy way to pay for
them. If you decide you need what’s being oered,
shop around before deciding on any particular seller.
Keep in mind that the total cost of the product or
service is the price the seller quotes plus the costs –
and fees – tied to getting the reverse mortgage.
Some who oer reverse mortgages may pressure you
to buy other nancial products, like an annuity or
long term care insurance. Resist that pressure. You
don’t have to buy any products or services to get a
reverse mortgage (except to maintain the adequate
homeowners or hazard insurance that HUD and
other lenders require). In fact, in some situations, it’s
illegal to require you to buy
other products to get a reverse
mortgage.
e bottom line: If you
don’t understand the cost or
features of a reverse mortgage
or any other product
oered to you – or if there is pressure or urgency
to complete the deal – walk away and take your
business elsewhere. Consider seeking the advice of a
family member, friend, or someone else you trust.
Your Right to Cancel
With most reverse mortgages, you have at least three
business days after closing to cancel the deal for any
reason, without penalty. To cancel, you must notify
the lender in writing. Send your letter by certied
mail, and ask for a return receipt. at will allow
you to document what the lender received and
when. Keep copies of your correspondence and any
enclosures. After you cancel, the lender has 20 days
to return any money you’ve paid up to then for the
nancing.
You don’t have to buy any
products or services to get a
reverse mortgage.
FTC Facts For Consumers 4
Reporting Possible Fraud
If you suspect that someone involved in the
transaction may be violating the law, let the
counselor, lender, or loan servicer know. en, le a
complaint with:
■ the Federal Trade Commission
(FTC). You can do that online at
www.ftccomplaintassistant.gov or by phone at
1-877-FTC-HELP (1-877-382-4357).
■ your state Attorney General’s oce at
naag.org or state banking regulatory agency at
www.csbs.org/Pages/default.aspx.
Whether a reverse mortgage is right for you is a big
question. Consider all your options. You may qualify
for less costly alternatives.
e following organizations
have more information:
Reverse Mortgage
Education Project
AARP Foundation
601 E Street, NW
Washington, DC 20049
www.aarp.org/revmort
1-800-209-8085
U. S. Department of Housing and Urban
Development (HUD)
451 7th Street, SW
Washington, DC 20410
www.hud.gov/oces/hsg/sfh/hecm/rmtopten.cfm
1-800-CALL-FHA (1-800-225-5342)
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
www.ftc.gov/yourhome
1-877-FTC-HELP ( 1-877-382-4357)
e FTC works to prevent fraudulent, deceptive
and unfair business practices in the marketplace
and to provide information to help consumers spot,
stop and avoid them. To le a complaint or get free
information on consumer issues, visit ftc.gov or
call toll-free, 1-877-FTC-HELP (1-877-382-4357);
TTY: 1-866-653-4261. Watch a video, How to File
a Complaint, at ftc.gov/video to learn more. e
FTC enters consumer complaints into the Consumer
Sentinel Network, a secure online database and
investigative tool used
by hundreds of civil and
criminal law enforcement
agencies in the U.S.
and abroad.
If there is pressure or urgency to
complete the deal, walk away and
take your business elsewhere.
FTC Facts For Consumers 5
e Federal Trade Commission (FTC) is the nation’s consumer protection agency. Here are some tips from
the FTC to help you be a more savvy consumer.
1. Know who you’re dealing with. Do business only with companies that clearly provide their name,
street address, and phone number.
2. Protect your personal information. Share credit card or other personal information only when
buying from a company you know and trust.
3. Take your time. Resist the urge to “act now.” Most any oer that’s good today will be good
tomorrow, too.
4. Rate the risks. Every potentially high-prot investment is a high-risk investment. at means you
could lose your investment — all of it.
5. Read the small print. Get all promises in writing and read all paperwork before making any
payments or signing any contracts. Pay special attention to the small print.
6. “Free” means free. row out any oer that says you have to pay to get a gift or a “free” gift. If
something is free or a gift, you don’t have to pay for it. Period.
7. Report fraud. If you think you’ve been a victim of fraud, report it. It’s one way to get even with a
scam artist who cheated you. By reporting your complaint to 1-877-FTC-HELP or ftc.gov, you are
providing important information to help law enforcement ocials track down scam artists and stop
them!
FTC Facts For Consumers 6
For The Consumer Federal Trade Commission
ftc.gov 1-877-ftc-help
Federal Trade Commission
Bureau of Consumer Protection
Division of Consumer and Business Education
