Consumer Counseling

• One of the primary characteristics of reverse mortgages is the educational component that must take place before it can proceed. This counseling provides security so that signing on the dotted line does not put homeowners or their families at risk. This step is mandated by law and best-practice guidelines that all lenders are required to follow. Counselors must be independent and not beholden to any particular lender. The U.S. Department of Housing and Urban Development maintains a network of these counselors, who are qualified to offer all relevant guidance. Lenders can also provide this information.
  
  

Interest Rates, Fees and Disbursements

• Borrowers can accept fixed or adjustable interest rates that change with an index based on the one-year Treasury Bill or the London Interbank Offered Rate, together with an extra margin that the lender charges. The total interest rate on adjustable reverse mortgages cannot exceed lifetime caps, as a further protection for borrowers. Origination fees are also limited and lenders can roll these into the transaction itself to minimize the borrower's upfront costs. Distributions from reverse mortgages may be in a lump sum, monthly payments, a line of credit or some combination of methods.
  
  

Disclosures

• The Federal Reserve Board mandates what is known as the Total Annual Loan Cost that lenders must reveal to all those who take out reverse mortgages. This clearly outlines all costs and fees over the life of the loan, which the independent counselor reviews with each client prior to acceptance. Reverse mortgages, by definition, cannot have due dates attached to them as long as the homeowner is alive. With no monthly payments and the security to live in the home as long as desired, homeowners can take comfort that lenders cannot force them from their houses even in times of financial distress. According to cautionary content Citibank includes on its website, however, "that doesn't solve the problem of what happens if you are forced to move out because you're out of cash or you violate the conditions of the loan."
  
  

Protections

• Lenders are permitted to assess a prepayment penalty if homeowners find a way to pay off the reverse mortgage during the first year, however unlikely that scenario. Borrowers also have the right to cancel the transaction within three days without providing a reason. When the reverse mortgage terminates either by the homeowner's death or desire to pay it off, the total amount put forth by the lender plus all applicable fees and interest must be paid, not to exceed the house's current worth if sold to settle the reverse mortgage.