The New Housing Law and Reverse Mortgages
President Bush signed a new housing bill on July 30, 2008, that raises the amount of money seniors can borrow on reverse mortgages, and lowers the cost of attaining that cash. Although this bill is, for the most part, a move in the right direction, seniors still need to be cautious when spending their home equities.
Below, the effects of the new law on reverse home mortgages are explained.
• Borrowing Limits
Most reverse mortgage loans are Home Equity Conversion Mortgages, or HECM reverse mortgages, which are backed by the Federal Housing Administration. The FHA limits the amount seniors can borrow with a HECM reverse mortgage, which previously ranged from $200,160 to $362,790, depending on the area in which the senior lived. The new housing law, which will take approximately 60 to 90 days to implement, creates a single national loan limit of $417,000. This amount can increase to as much as $625,500 in areas that have a high cost-of-living.
• Reverse Mortgage Fees
The origination fees lenders were able to charge were limited at 2% of the property’s value or the county lending limit, whichever figure is lower. The new housing bill reduced the maximum reverse mortgage fees to 2% on up to a $200,000 limit of the property’s value and 1% on the balance thereafter, with a cap of $6,000.
Tip: Some lenders charge even less than the maximum, so be smart, shop around, and negotiate on the fees charged. Also, bargain on closing costs, service fees, mortgage insurance premiums, and interest rates. There are many lenders in the current reverse mortgage market, so seniors should put themselves in the driver’s seat.
• Sales Pitches
Many borrowers reported that their potential lenders attempted to require them to purchase additional financial products like annuities and long-term insurance. The new housing bill prohibits lenders from requiring the purchase of annuities and other financial products.
President Bush’s approval of this new bill reinforces the important advantages the reverse mortgage industry offers to senior homeowners. Although the stricter enforcements the bill provides are positive steps, not just for the reverse mortgage market, but also for the housing market in general, the bill also serves as a reminder to senior homeowners to do their research and tread cautiously before embarking on any new financial obligation.