1. Do you really need a reverse mortgage? Why are you interested in these loans? What would you do with the money you would get from one? Are the needs you intend to meet really worth the high total cost of these loans? If you want to take a dream vacation, a reverse mortgage is a very expensive way to pay for it. Investing the money from these loans is an especially bad idea, because the loan is highly likely to cost more than you could safely earn. If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it.
2.  Can you afford a reverse mortgage? These loans are very expensive, and the amount you owe grows larger every month. The younger you are when you take out a reverse mortgage, the more the compound interest will grow, and the more you will owe. On the other hand, due to high up-front costs, these loans can be especially costly if you sell and move just a few years after taking one out.
3. Can you afford to start using up your home equity now? The more you use now, the less you will have later when you may need it more, for example, to pay for future emergencies, health care needs, or everyday living expenses. This is especially so if your needs suddenly grow or your income does not keep pace with inflation. You may also need your equity to pay for future home repairs or a move to assisted living. If you are not facing a financial emergency now, then consider postponing a reverse mortgage. Homeowners who decide to wait have "a reasonable expectation of securing a better product at a lower cost in the not-too-distant future," according to a report by the Fidelity Research Institute.
4.  Do you have less costly options? Do you have other financial resources that you could use instead of taking out a loan? If you don't, and if you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are much less costly than a reverse mortgage. Many state and local governments offer very low-cost loans for paying your property taxes or making home repairs. Have you seriously looked into the costs and benefits of selling your home and moving to a less expensive one?
5.  Do you fully understand how these loans work? Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique. Before considering one, you need to do your homework carefully and thoroughly.

You have five options:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.
• Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

acceleration clause - the part of a contract that says when a loan may be declared due and payable

adjustable rate - an interest rate that changes, based on changes in a published market-rate index

appraisal - an estimate of much a house would sell for if it were sold; also called its market value

appreciation - an increase in a home's value

Area Agency on Aging (AAA) - a local or regional nonprofit organization that provides information on services and programs for older adults

cap - a limit on the amount an adjustable interest rate may go up or down during a specified time period

closing - a meeting where documents are signed to "close the deal" on a mortgage; the time a mortgage begins

CMT rate - the Constant Maturity Treasury rate, used as an interest rate index in the HECM program

condemnation - a court action saying a property is unfit for use: also, the government taking private property to use for the public by the right of eminent domain

creditline - a credit account that lets a borrower decide when to take money out and also how much to take out; also known as a "line-of-credit" or "credit line."

current interest rate - in the HECM program, the interest rate currently being charged on a loan, which equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin

deferred payment loans (DPLs) - reverse mortgages that give you a lump sum of cash to repair or improve a home; usually offered by state or local governments

depreciation - a decrease in the value of a home

eminent domain - the right of a government to take private property for public use; for example, taking private land to build a highway

expected interest rate - in the HECM program, the interest rate used to determine a borrower's loan advance amounts; it equals either the 10-year CMT or the 10-year LIBOR rate plus a margin (see below)

Fannie Mae - a private company that buys and sells mortgages; a government-sponsored business that is watched over by the federal government

Federal Housing Administration (FHA) - the part of the U. S. Department of Housing and Urban Development (HUD) that insures HECM loans

federally insured reverse mortgage - a reverse mortgage guaranteed by the federal government so you will always get what the loan promises; also, a Home Equity Conversion Mortgage (HECM)

fixed monthly loan advances - payments of the same amount that are made to a borrower each month

home equity - the value of a home, subtracting any money owed on it

home equity conversion - turning home equity into cash without having to leave your home or make regular loan repayments

Home Equity Conversion Mortgage (HECM) - the only reverse mortgage program insured by the Federal Housing Administration, a federal government agency

home value limit - in the HECM program, the largest home value that can be used to determine a borrower's loan advances

initial interest rate - in the HECM program, the interest rate that is first charged on the loan beginning at closing; it equals one of the HUD-approved interest rate indices (1-month CMT, 1-year CMT, or 1-month LIBOR) plus a margin

leftover equity - the sale price of the home minus the total amount owed on it and the cost of selling it; the amount the homeowner or heirs get when the house is sold.

LIBOR - the London Interbank Offered Rate, used as an interest rate index in the HECM program

loan advances - payments made to a borrower, or to another party on behalf of a borrower

loan balance - the amount owed, including principal and interest; capped in a reverse mortgage by the value of the home when the loan is repaid.
 
lump sum - a single loan advance at closing

margin - in the HECM program, the amount added to an interest rate index to determine the initial, current, and expected interest rates

maturity - when a loan must be repaid; when it becomes "due and payable"

model specifications - rules recommended by AARP for analyzing and comparing reverse mortgages

mortgage - a legal document making a home available to a lender to repay a debt

non-recourse mortgage - a home loan in which the borrower generally cannot owe more than the home's value at the time the loan is repaid

origination - the process of setting up a mortgage, including preparing documents

property tax deferral (PTD) - reverse mortgages that pay annual property taxes; usually offered by state or local governments

proprietary reverse mortgage - a reverse mortgage product owned by a private company

reverse mortgage - a home loan that gives cash advances to a homeowner, requires no repayment until a future time, and is capped by the value of the home when the loan is repaid

right of recission - a borrower's right to cancel a home loan within three business days of the closing

servicing - administering a loan after closing, such as maintaining loan records and sending statements

Supplemental Security Income (SSI) - a federal monthly income program for low-income persons who are aged 65+, blind, or disabled

tenure advances - fixed monthly loan advances for as long as a borrower lives in a home

term advances - fixed monthly loan advances for a specific period of time

Total Annual Loan Cost (TALC) rate - the projected annual average cost of a reverse mortgage including all itemized costs