retirement
Rules rev-up reverse mortgages

For a reverse mortgage, "the only out-of-pocket costs for consumers are the home appraisals and the counseling," says Hicks. In some cases, the counseling is offered free or at a low cost, but it can run as high as $125. FHA home appraisals generally run about $300.

Problems discovered during the inspection must be corrected, but can be taken care of before or after the loan closes. If the homeowner chooses to do it after, money is set aside for that purpose.

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)
  • Failure to pay taxes or required insurance (such as hazard insurance)
  • 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," says Belling. "It's a difficult time right now." Shopping "does require some perseverance," she says.

With federally backed loans, borrowers can also choose between an adjustable rate that changes either monthly or annually, or a fixed rate (which is usually several percentage points higher), says Hicks. Consumer advocates are cautioning borrowers that this is one instance when a fixed rate is not automatically superior.

One of the biggest problems with reverse mortgages is that they're complicated. Reverse mortgages "are difficult for the borrower to understand," says Tyson. 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," Tyson says.

It's the lender's job to explain the program upfront, says Hicks. They can also 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 different.

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 him or her to attend the counseling session with you.

You can also hire a fee-only financial planner for some professional, neutral, third-party advice such as the National Association of Personal Financial Advisors, or call the AARP hot line at (800) 209-8085 to locate an exam-certified counselor.

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