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Reverse
Mortgages Continued...
How Reverse Mortgages Differ
This section describes how the three types of RMs -- FHA-insured, lender-insured, and
uninsured -- vary according to their costs and terms. Although the FHA and lender-insured
plans appear similar, important differences exist. This section also discusses advantages
and drawbacks of each loan type.
* FHA-insured. This plan offers several RM payment options. You may
receive monthly loan advances for a fixed term or for as long as you live in the home, a
line of credit, or monthly loan advances plus a line of credit. This RM is not due as long
as you live in your home. With the line of credit option, you may draw amounts as you need
them over time. Closing costs, a mortgage insurance premium and sometimes a monthly
servicing fee is required. Interest is charged at an adjustable rate on your loan balance;
any interest rate changes do not affect the monthly payment, but rather how quickly the
loan balance grows over time.
The FHA-insured RM permits changes in payment options at little cost. This plan also
protects you by guaranteeing that loan advances will continue to be made to you if a
lender defaults. However, FHA-insured RMs may provide smaller loan advances than
lender-insured plans. Also, FHA loan costs may be greater than uninsured plans.
* Lender-insured. These RMs offer monthly loan advances or monthly loan
advances plus a line of credit for as long as you live in your home. Interest may be
assessed at a fixed rate or an adjustable rate, and additional loan costs can include a
mortgage insurance premium (which may be fixed or variable) and other loan fees.
Loan advances from a lender-insured plan may be larger than those provided by FHA-insured
plans. Lender-insured RMs also may allow you to mortgage less than the full value of your
home, thus preserving home equity for later use by you or your heirs. However, these loans
may involve greater loan costs than FHA-insured, or uninsured loans. Higher costs mean
that your loan balance grows faster, leaving you with less equity over time.
Some lender-insured plans include an annuity that continues making monthly payments to you
even if you sell your home and move. The security of these payments depends on the
financial strength of the company providing them, so be sure to check the financial
ratings of that company. Annuity payments may be taxable and affect your eligibility for
Supplemental Security Income and Medicaid. These "reverse annuity mortgages" may
also include additional charges based on increases in the value of your home during the
term of your loan.
* Uninsured. This RM is dramatically different from FHA and
lender-insured RMs. An uninsured plan provides monthly loan advances for a fixed term only
-- a definite number of years that you select when you first take out the loan. Your loan
balance becomes due and payable when the loan advances stop. Interest is usually set at a
fixed interest rate and no mortgage insurance premium is required.
If you consider an uninsured RM, carefully think about the amount of money you need
monthly; how many years you may need the money; how you will repay the loan when it comes
due; and how much remaining equity you will need after paying off the loan.
If you have short-term but substantial cash needs, the uninsured RM can provide a greater
monthly advance than the other plans. However, because you must pay back the loan by a
specific date, it is important for you to have a source of repayment. If you are unable to
repay the loan, you may have to sell your home and move.
Reverse Mortgage Safeguards
One of the best protections you have with RMs is the Federal Truth in Lending Act,
which requires lenders to inform you about the plan's terms and costs. Be sure you
understand them before signing. Among other information, lenders must disclose the Annual
Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must
provide specific information about the variable rate feature. On plans with credit lines,
lenders also must inform you of any charges to open and use the account, such as an
appraisal, a credit report, or attorney's fees.
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