Reverse Mortgages:

Get the Facts Before Cashing in on Your Home’s Equity

I

f you’re 62 or older – and looking for money 

to finance a home improvement, pay off your 

current mortgage, supplement your retirement 

income, or pay for healthcare expenses – you may 

be considering a reverse mortgage. It’s a product 

that allows you to convert part of the equity in your 

home into cash without having to sell your home or 

pay additional monthly bills. 

The Federal Trade Commission (FTC), the 

nation’s consumer protection agency, wants you to 

understand how reverse mortgages work, the types of 

reverse mortgages available, and 

how to get the best deal.

In a “regular” mortgage, you 

make monthly payments to the 

lender. In a “reverse” mortgage, 

you receive money from the 

lender, and generally don’t have 

to pay it back for as long as you 

live in your home. The loan is 

repaid when you die, sell your 

home, or when your home is no longer your primary 

residence. The proceeds of a reverse mortgage 

generally are tax-free, and many reverse mortgages 

have no income restrictions.

Types of Reverse 

Mortgages

There are three types of reverse mortgages:

■ single-purpose reverse mortgages, offered by 

some state and local government agencies and 

nonprofit organizations

■ federally-insured reverse mortgages, known as 

Home Equity Conversion Mortgages (HECMs) 

and backed by the U. S. Department of Housing 

and Urban Development (HUD)

■ proprietary reverse mortgages,

private loans that are backed 

by the companies that develop 

them.

■ Single-purpose reverse 

mortgages are the least 

expensive option. They are not 

available everywhere and can 

be used for only one purpose, 

which is specified by the 

government or nonprofit lender. For example, 

the lender might say the loan may be used only 

to pay for home repairs, improvements, or 

property taxes. Most homeowners with low or 

moderate income can qualify for these loans.

March 2011

In a reverse mortgage, you 

receive money from the 

lender, and generally don’t 

have to pay it back for as long 

as you live in your home.
■ HECMs and proprietary reverse mortgages 

may be more expensive than traditional home 

loans, and the upfront costs can be high. That’s 

important to consider, especially if you plan 

to stay in your home for just a short time or 

borrow a small amount. HECM loans are 

widely available, have no income or medical 

requirements, and can be used for any purpose.

Before applying for a HECM, you must meet with 

a counselor from an independent governmentapproved housing counseling agency. Some lenders 

offering proprietary reverse mortgages also require 

counseling. The counselor is required to explain 

the loan’s costs and financial implications, and 

possible alternatives to a HECM, like government 

and nonprofit programs or a single-purpose or 

proprietary reverse mortgage. The counselor also 

should be able to help you compare the costs of 

different types of reverse mortgages and tell you 

how different payment 

options, fees, and other 

costs affect the total cost 

of the loan over time. 

To find a counselor, visit 

www.hud.gov/offices/hsg/

sfh/hecm/hecmlist.cfm or 

call 1-800-569-4287. Most 

counseling agencies charge 

around $125 for their services. The fee can be paid 

from the loan proceeds, but you cannot be turned 

away if you can’t afford the fee. 

How much you can borrow with a HECM or 

proprietary reverse mortgage depends on several 

factors, including your age, the type of reverse 

mortgage you select, the appraised value of your 

home, and current interest rates. In general, the 

older you are, the more equity you have in your 

home, and the less you owe on it, the more money 

you can get.

The HECM lets you choose among several payment 

options. You can select:

■ a “term” option – fixed monthly cash advances 

for a specific time.

■ a “tenure” option – fixed monthly cash advances 

for as long as you live in your home.

■ a line of credit that lets you draw down the loan 

proceeds at any time in amounts you choose 

until you have used up the line of credit.

■ a combination of monthly payments and a line 

of credit.

You can change your payment option any time for 

about $20.

HECMs generally provide 

bigger loan advances at a lower 

total cost compared with 

proprietary loans. But if you 

own a higher-valued home, 

you may get a bigger loan 

advance from a proprietary 

reverse mortgage. So if your 

home has a higher appraised 

value and you have a small mortgage, you may 

qualify for more funds. 

Loan Features

Reverse mortgage loan advances are not taxable, 

and generally don’t affect your Social Security or 

Medicare benefits. You retain the title to your home, 

and you don’t have to make monthly repayments. 

The loan must be repaid when the last surviving 

HECM loans are widely available, 

have no income or medical 

requirements, and can be used for 

any purpose.

FTC Facts For Consumers 2 
borrower dies, sells the home, or no longer lives in 

the home as a principal residence. 

In the HECM program, a borrower can live in a 

nursing home or other medical facility for up to 12 

consecutive months before the loan must be repaid.

If you’re considering a reverse mortgage, be aware that:

■ Lenders generally 

charge an origination 

fee, a mortgage 

insurance premium 

(for federally-insured 

HECMs), and other 

closing costs for a 

reverse mortgage. 

Lenders also may charge servicing fees during the 

term of the mortgage. The lender sometimes sets 

these fees and costs, although origination fees for 

HECM reverse mortgages currently are dictated 

by law. Your upfront costs can be lowered if 

you borrow a smaller amount through a reverse 

mortgage product called a “HECM Saver.”

■ The amount you owe on a reverse mortgage 

grows over time. Interest is charged on the 

outstanding balance and added to the amount 

you owe each month. That means your total debt 

increases as the loan funds are advanced to you 

and interest on the loan accrues. 

■ Although some reverse mortgages have fixed 

rates, most have variable rates that are tied to a 

financial index: they are likely to change with 

market conditions.

■ Reverse mortgages can use up all or some of the 

equity in your home, and leave fewer assets for 

you and your heirs. Most reverse mortgages have 

a “nonrecourse” clause, which prevents you or 

your estate from owing more than the value of 

your home when the loan becomes due and the 

home is sold. However, if you or your heirs want 

to retain ownership of the home, you usually 

must repay the loan in full – even if the loan 

balance is greater than 

the value of the home. 

■ Because you retain 

title to your home, 

you are responsible 

for property taxes, 

insurance, utilities, 

fuel, maintenance, and 

other expenses. If you don’t pay property taxes, 

carry homeowner’s insurance, or maintain the 

condition of your home, your loan may become 

due and payable. 

■ Interest on reverse mortgages is not deductible 

on income tax returns until the loan is paid off 

in part or whole. 

Getting a Good Deal

If you’re considering a reverse mortgage, shop 

around. Compare your options and the terms 

various lenders offer. Learn as much as you can about 

reverse mortgages before you talk to a counselor or 

lender. That can help inform the questions you ask 

that could lead to a better deal.

■ If you want to make a home repair or 

improvement – or you need help paying your 

property taxes – find out if you qualify for any 

low-cost single-purpose loans in your area. Area 

Agencies on Aging (AAAs) generally know about 

these programs. To find the nearest agency, visit 

Reverse mortgage loan advances are not 

taxable, and generally don’t affect your 

Social Security or Medicare benefits.

FTC Facts For Consumers 3
www.eldercare.gov or call 1-800-677-1116. Ask 

about “loan or grant programs for home repairs 

or improvements,” or “property tax deferral” or 

“property tax postponement” programs, and how 

to apply. 

■ All HECM lenders must follow HUD rules. 

And while the mortgage insurance premium 

is the same from lender to lender, most loan 

costs, including the origination fee, interest 

rate, closing costs, and servicing fees vary 

among lenders. 

■ If you live in a highervalued home, you may 

be able to borrow more 

with a proprietary reverse 

mortgage, but the more 

you borrow, the higher 

your costs. The best way 

to see key differences 

between a HECM and a proprietary loan is 

to do a side-by-side comparison of costs and 

benefits. Many HECM counselors and lenders 

can give you this important information. 

■ No matter what type of reverse mortgage you’re 

considering, understand all the conditions 

that could make the loan due and payable. 

Ask a counselor or lender to explain the Total 

Annual Loan Cost (TALC) rates: they show 

the projected annual average cost of a reverse 

mortgage, including all the itemized costs. 

Be Wary of Sales Pitches

Some sellers may offer you goods or services, like 

home improvement services, and then suggest that 

a reverse mortgage would be an easy way to pay for 

them. If you decide you need what’s being offered, 

shop around before deciding on any particular seller. 

Keep in mind that the total cost of the product or 

service is the price the seller quotes plus the costs – 

and fees – tied to getting the reverse mortgage.

Some who offer reverse mortgages may pressure you 

to buy other financial products, like an annuity or 

long term care insurance. Resist that pressure. You 

don’t have to buy any products or services to get a 

reverse mortgage (except to maintain the adequate 

homeowners or hazard insurance that HUD and 

other lenders require). In fact, in some situations, it’s 

illegal to require you to buy 

other products to get a reverse 

mortgage.

The bottom line: If you 

don’t understand the cost or 

features of a reverse mortgage 

or any other product 

offered to you – or if there is pressure or urgency 

to complete the deal – walk away and take your 

business elsewhere. Consider seeking the advice of a 

family member, friend, or someone else you trust. 

Your Right to Cancel

With most reverse mortgages, you have at least three 

business days after closing to cancel the deal for any 

reason, without penalty. To cancel, you must notify 

the lender in writing. Send your letter by certified 

mail, and ask for a return receipt. That will allow 

you to document what the lender received and 

when. Keep copies of your correspondence and any 

enclosures. After you cancel, the lender has 20 days 

to return any money you’ve paid up to then for the 

financing.

You don’t have to buy any 

products or services to get a 

reverse mortgage. 

FTC Facts For Consumers 4 
Reporting Possible Fraud

If you suspect that someone involved in the 

transaction may be violating the law, let the 

counselor, lender, or loan servicer know. Then, file a 

complaint with:

■ the Federal Trade Commission 

(FTC). You can do that online at 

www.ftccomplaintassistant.gov or by phone at 

1-877-FTC-HELP (1-877-382-4357). 

■ your state Attorney General’s office at 

naag.org or state banking regulatory agency at 

www.csbs.org/Pages/default.aspx.

Whether a reverse mortgage is right for you is a big 

question. Consider all your options. You may qualify 

for less costly alternatives. 

The following organizations 

have more information:

Reverse Mortgage 

Education Project

AARP Foundation

601 E Street, NW

Washington, DC 20049

www.aarp.org/revmort

1-800-209-8085

U. S. Department of Housing and Urban 

Development (HUD)

451 7th Street, SW

Washington, DC 20410

www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm

1-800-CALL-FHA (1-800-225-5342)

Federal Trade Commission

Consumer Response Center

600 Pennsylvania Avenue, NW

Washington, DC 20580

www.ftc.gov/yourhome

1-877-FTC-HELP (1-877-382-4357)

The FTC works to prevent fraudulent, deceptive 

and unfair business practices in the marketplace 

and to provide information to help consumers spot, 

stop and avoid them. To file a complaint or get free 

information on consumer issues, visit ftc.gov or 

call toll-free, 1-877-FTC-HELP (1-877-382-4357); 

TTY: 1-866-653-4261. Watch a video, How to File 

a Complaint, at ftc.gov/video to learn more. The 

FTC enters consumer complaints into the Consumer 

Sentinel Network, a secure online database and 

investigative tool used 

by hundreds of civil and 

criminal law enforcement 

agencies in the U.S. 

and abroad.

If there is pressure or urgency to 

complete the deal, walk away and 

take your business elsewhere.

FTC Facts For Consumers 5
The Federal Trade Commission (FTC) is the nation’s consumer protection agency. Here are some tips from 

the FTC to help you be a more savvy consumer.

1. Know who you’re dealing with. Do business only with companies that clearly provide their name, 

street address, and phone number.

2. Protect your personal information. Share credit card or other personal information only when 

buying from a company you know and trust. 

3. Take your time. Resist the urge to “act now.” Most any offer that’s good today will be good 

tomorrow, too. 

4. Rate the risks. Every potentially high-profit investment is a high-risk investment. That means you 

could lose your investment — all of it. 

5. Read the small print. Get all promises in writing and read all paperwork before making any 

payments or signing any contracts. Pay special attention to the small print. 

6. “Free” means free. Throw out any offer that says you have to pay to get a gift or a “free” gift. If 

something is free or a gift, you don’t have to pay for it. Period. 

7. Report fraud. If you think you’ve been a victim of fraud, report it. It’s one way to get even with a 

scam artist who cheated you. By reporting your complaint to 1-877-FTC-HELP or ftc.gov, you are 

providing important information to help law enforcement officials track down scam artists and stop 

them! 

FTC Facts For Consumers 6 

For The Consumer Federal Trade Commission

ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education