Housing Law Means Changes to Reverse Mortgages

The Housing and Economic Recovery Act of 2008, signed by President Bush on July 30, ups the borrowing limits on reverse mortgages, puts the brakes on aggresive marketing of reverse mortgages, and limits the fees a financial institution can charge for reverse mortgages.

A reverse mortgage is a loan that lets you convert part of the equity you have in your home into income. This is similar to a standard mortgage, but with a reverse mortgage you don't need an income to qualify and there are no monthly loan payments. Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, maintenance, and other expenses. When you sell your home or no longer use it for your primary residence, you or your estate repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. In the last four years, the reverse mortgage market has grown 500 percent. Just under 8,000 applications were taken in 2001, but 43,000 applications were taken in 2005. That number tripled in 2007.

The new law, which went into affect October 1, 2008, increases the borrowing level on reverse mortgages. The national limit on the amount a homeowner can borrow is now $417,000. However, the limit can be increased to $625,000 in areas with high housing costs, for example some areas of San Diego. The amount a homeowner can actually borrow depends on the home's value, location, interest rates, and the age of the borrower. Currently, the range in loan limits is between $200,160 and $362,790. The housing bill also reduced the maximum fee to 2 percent on the initial $200,000 of the home's value and 1 percent on the balance thereafter, with a cap of $6,000.