How Safe is Getting Reverse Mortgage Today

In past reverse mortgage was considered to be a risky affair for a borrower, but today, with new norms and guidelines in place, it is much safer. Consumer safeguard guidelines play an important part in ensuring that as a borrower you know what you are getting into.

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Some of the key safeguards introduced are:

  • Independent counseling sessions: Even before a borrowers application is processed, he has to undergo an counseling session with an independent counselor. To ensure that the work of counseling is conducted smoothly and with full honesty, the review of network of the counselors fall under US Department of Housing and Development (HUD).
  • Cap on fees charged: Origination fee is capped and it can be financed from the mortgage itself. This ensures that little money is paid by a borrower before he actually gets reverse mortgage money
  • Interest rates are capped: Interest rates which are generally calculated using 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. These rates can be either monthly or annually adjusted. Importantly, in both these situation, there is a lifetime cap on the interest rates. Thus safeguarding by very high fluctuation in rates.
  • Required advance disclosures: To ensure that the borrowers gets fair idea of its transation costs during a period of time, under FHA HECM program, the Total Annual Loan Cost has to be mandatorily disclosed. This gives a clear picture of what a borrower is getting into while taking a reverse mortgage.
  • No pre-payment penalty: In many cases, if the borrower pre-pays a loan there is a penalty levied by the lender. But not in the case of reverse mortgage.
  • No penalty for cancellation: If a borrower decides to cancel the loan within 3 days of the transaction, there is no penalty under the right of rescission.
  • Asset Protection: The outstanding amount to be paid by the borrower cannot exceed the total value of the home. So, 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.
  • No shared appreciation: This means that no reverse mortgage product in the marketplace has “equity-sharing” or “shared appreciation” features. Thus a borrower cannot obtain more money in exchange for giving up a percentage of the future value of the home
  • No maturity date: The reverse mortgage cannot be due during the lifetime of a borrower. Thus you live in the house as long you live, no questions asked! 

The above safeguards make reverse mortgage much more consumer friendly financial product to use by seniors. But still make sure that you are very sure why you want to take reverse mortgage and where would you liek to use its money.