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  Reverse mortgages are becoming more popular as senior citizens in America are seeking alternate forms of income. When entering into a reverse mortgage loan, it is important that you have information on prepayment penalties, which are specific to your state. As of January 1, 2009, Rhode Island was the only state with a prepayment penalty on reverse mortgage loans.
  
  

Prepayment Penalty

• A prepayment penalty is a charge the lender requires when a borrower pays off a loan before the loan period ends. Lenders favor penalties of this nature because of the high cost of loan initiation and the high rate of refinance. If the loan is turned over quickly, the lender has not made enough to pay the costs it advanced. The lender, in effect, loses the interest money from the life of the loan. Lenders say that agreeing to the loan is agreeing to pay the term's interest. Borrowers often prefer the ability to pay off the loan at their own pace, even if it is more quickly than the lender specified.
  
  

Reverse Mortgage

• Specifically made for home owners 62 years of age or older, reverse mortgages allow borrowers to turn their home's equity into income. The cash from a reverse mortgage can be paid to the borrower in a lump sum, as a monthly cash advance, as a line of credit or as some combination thereof. No repayment is required until the borrower dies, sells the home or permanently moves out of the residence.
  
  

Rhode Island Law

• As of January 1, 2009, Rhode Island law states that lenders can charge a prepayment penalty to anyone who pays off their loan early. The law is designed to off-set the cost of closing loans for the lender, which can be significant. Reverse mortgages are still offered with reduced or no up-front fees with certain qualifications under the new law. The law mandates full disclosure of lender's fees and requires financial counseling to anyone entering into a reverse mortgage. There is also a three-day waiting period on the closing of the loan. A reverse mortgage will not accrue a penalty in the event of death or sale of the property. The penalty is calculated as a percentage of the available credit limit on the loan and is prorated according to the amount of time remaining on the loan.