New rules rev up reverse mortgages
Borrowers also need to know that with the federally backed loans, there are three ways the lender can force a sale:
- If you've vacated the house (leave for more than one year).
- If you fail to pay taxes
or have required insurance (such as hazard
- If the home falls into serious disrepair.
With a private loan, the rules could be different, so you want to understand the contract completely.
Smart-money tip: As with any
other mortgage, it pays to shop around. You'll
get different offers from various lenders,
even if they think your home is worth the
same amount. That's because they have different
interest rates and different origination fees.
Rates are often tied to indexes, such as the
one-year Treasury bond rate or the London
Interbank Offered Rate, often called the Libor.
But not all lenders use the same index. And
even if they do, they may add a different
percentage to it to obtain their total rate.
"Bankers offer different products,
and rates change once a week," Belling says.
"It's a difficult time right now." Shopping
"does require some perseverance," she says.
With federally backed loans,
borrowers also can choose between an adjustable
rate that changes either monthly or annually,
or a fixed rate (which is usually several
percentage points higher), Hicks says. Consumer
advocates are cautioning borrowers that this
is one instance when a fixed rate is not automatically
One of the biggest problems
with reverse mortgages is that they're complicated.
Reverse mortgages "are difficult for the borrower
to understand," Tyson says. And that's one
reason that the government backed loans require
a counseling session -- a good idea for anyone
considering the idea, he says. "It would really
be foolish not to take advantage of that,"
It's the lender's job to explain
the program upfront, Hicks says. It also can
give you an estimate, which could change based
on the results of your appraisal.
Borrowers should definitely
call around and compare offers from different
lenders, he says. "There's a lot of competition
out there right now for people's business,"
Hicks says. Even though loans are federally
backed, terms and fee structures can be very
Belling recommends reading all
the information you can get your hands on
-- AARP offers a free 46-page manual, "Home
Made Money," which you can
download or have sent to you via regular
mail -- and talk with your friends. If you
have a trusted family member, invite that
person to attend the counseling session with
You also can hire a fee-only
financial planner through the National
Association of Personal Financial Advisors
or call the AARP hot line at (800) 209-8085 to
locate an exam-certified counselor for some
professional, neutral, third-party advice.
Updated: Dec. 30, 2008