Today’s reverse mortgage programs contain numerous safety features to reassure seniors that they retain their rights as the homeowner, and thereby reduce the risk to themselves, their home, or their family.
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, make sure the borrower understands the loan, and suggest alternative options.
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 is designed to last for the homeowner’s lifetime; it is a permanent tool. Whereas in a regular forward loan a fixed rate is fixed for a particular term, like 20 or 30 years, the fixed rate on a standard HECM loan has no term other than the lifetime of the borrower. 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. Although the loan is not due and payable typically until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.
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.
8) No Change in Title. You as the borrower retain title to the home, just as with a regular forward mortgage. In many cases it's even possible to close the loan within the trust, if the title is held in a trust.