Reverse Mortgages: Are They A Penalty-Free Zone?

You say your parents are considering a reverse mortgage and they have asked you to research it for them?

Don’t worry; I hear that story at least a couple of times a week. Of course they want you to do the up front research and they will trust your recommendation.

Your parents have probably not taken out any type of mortgage in a number of years and the terminology alone (not to mention the coverage of the subprime mess) can be daunting. Let me put your mind at ease a little bit.

Most reverse mortgages (FHA HECM and Fannie Mae HomeKeeper) do not carry a prepayment penalty. In the case of other proprietary products, there may be a penalty if the loan is paid off either in part or after only a short time.

So if the plan is to take out a reverse mortgage and keep it only for a set number of years, perhaps 10, a prepayment penalty is not a concern. This can be a valuable feature in a situation where the borrower must vacate the home sooner than planned (example: health issues that require a move to a nursing home).

As always, be sure to check with your lender about all provisions and requirements associated with a reverse mortgage. If a prepayment penalty is a concern, then ask specifically whether or not there is one, when the penalty period ends and the specific size of the penalty in BOTH percentage and dollar terms. Get your answers in writing before you make a loan commitment. An experienced lender will be able to explain without pressue to both you and your parents the options available.

If a reverse mortgage is appropriate, then the best advice — as with any financial vehicle — is to consult with experienced reverse mortgage lenders in addition to family members or other trusted advisors to determine if a reverse mortgage is the right choice for you.

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Contributor Sue Haviland, based in Baltimore, MD has been a reverse mortgage specialist for more than five years.

This entry was posted on Sunday, January 27th, 2008 at 3:46 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.