If you are considering a reverse mortgage loan, it is important to know that:
- Reverse mortgage loans differ substantially from conventional forward mortgage loans.
- They are complex financial transactions, which require all borrowers to attend a counseling session.
- The types and variations of reverse mortgages are expanding rapidly.
- They may impact the accumulated equity in your home.
- You should understand the complete transaction, including your obligations and the associated costs and fees, before signing any loan documents.
Explore the following links to better understand what a reverse mortgage entails and if it is right for you.
What is a Reverse Mortgage Loan?
A reverse mortgage loan is a special type of mortgage loan for seniors (generally age 62 and older) that pays a homeowner loan proceeds drawn from accumulated home equity. Unlike a traditional home equity loan or second mortgage loan, no repayment is required until the borrower(s) no longer use their home as their principal residence. Interest on a conventional loan is calculated as simple interest while on a reverse mortgage the interest is calculated as compound interest.
Reverse mortgage loans were generally introduced in the market in 1989 with the U. S. Department of Housing and Urban Development (HUD) sponsored, FHA-insured, Home Equity Conversion Mortgage (HECM). The HECM is one of the most common types of reverse mortgage loans. In Massachusetts the Term Reverse Mortgage has been available since 1983 from more than 68 lenders, banks and credit unions across the state.
Additional information on the HECM reverse mortgage loan is available at the following link to the HUD website
Additional information on the Term Reverse Mortgage is available at www.elderhomeowners.org
Points to Remember about Reverse Mortgages
- Do some homework! There are a number of additional resources that explain reverse mortgages.
- Make sure you are doing business with a lender with an approved reverse mortgage program in the Commonwealth. Check this link to see the list of approved lenders .
Counseling by an approved agency is mandatory for all borrowers prior to obtaining a reverse mortgage.
- The Commonwealth's Executive Office of Elder Affairs approves the counseling agencies. Check to see if the counselor is on this list of approved counseling agencies.
- Participate in an "in person" counseling session, if possible.
- Have family members and/or trusted advisors with you to the counseling session.
- Ask the counselor about resources, services and benefits available to seniors from non-profit and/or government programs.
- Ask the counselor about alternative loan products.
- Ask the counselor how to interpret the loan documents.
- Be sure you and any co-borrower receive certificates and documentation.
- A typical reverse mortgage loan has up front fees and costs, which should be reviewed carefully. These fees may amount to thousands of dollars and increase the amount owed on the loan. Therefore, understand the total costs associated with the loan by asking questions and insisting on answers.
Typical fees include:
- Origination fees
- Mortgage Premium Insurance. Be sure you understand to what this premium refers.
- Closing Costs
- Service fees
- Monthly Mortgage fee that increases as the loan balance increases. Be sure you understand what this insurance protects.
- Origination fees
- Massachusetts law requires a 7-day cooling off period so that you have the right not to proceed with the loan for 7 days after signing a loan commitment letter.
- Federal and State laws also grant you the right to rescind or cancel the transaction within 3 business days from the date of closing the reverse mortgage loan.
Other Key Issues to be Mindful of:
- Sales tactics involving the required or suggested purchase of annuities, other investments, long term care insurance or other types of insurance policies with proceeds from the loan.
- Sales tactics involving contractors looking for proceeds to pay for home repairs.
- Being advised to transfer title to the property out of you or your spouse's name to qualify for the loan. Understand the legal consequences of title transfers.
- Being advised to have loan proceeds payable to third parties, and not you as the borrower(s).
- Estate planning services that offer to refer you to a lender for a fee or percentage of the loan. You can obtain information on lenders from the Division of Banks and HUD at no cost.
- Beware of pressure to draw down all of you available equity into a single upfront disbursement. Keep in mind that conditions for these mortgages include keeping current with real estate taxes, property insurance and property maintenance.
Some Words of Advice:
- Obtain independent legal and other financial advice prior to signing loan documents and retain your own legal representation at closing of the loan.
- Discuss the loan with trusted family members.
- Know that reverse mortgage loans cannot have prepayment penalties or restrictions. Loans must be able to be prepaid in full or in part at any time without penalty.
- Understand your obligations under the loan, i.e. to pay taxes, insurance, and maintain the property in a satisfactory condition. Failure to fulfill these obligations may constitute a default and possibly lead to foreclosure action.
- Understand that over time the loan balance may increase and impact the accumulated equity in your property, leaving little or no reserve for potential unexpected expense such as health care and home repair.
- Contact the Division's Consumer Assistance Unit at 617-956-1501 with any questions or complaints.