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New law makes changes to reverse mortgages

In addition to addressing the current housing crisis, the Housing and Economic Recovery Act of 2008 makes changes to reverse mortgages, including higher borrowing limits and protections from aggressive marketing.

A reverse mortgage allows a homeowner who is at least 62 years old to use the equity in his or her home to obtain a loan that doesn’t have to be repaid until the homeowner moves, sells, or dies. The new law, which took effect in October, increases the borrowing level on reverse mortgages. The national limit on the amount a homeowner can borrow is now $417,000. This limit can be increased to $625,000 in areas with high housing costs. This is a big jump from the earlier limits, which were $200,160 and $362,790.

Of course, these are the maximum loan amounts. The amount a homeowner can actually borrow depends on the home’s value and location, interest rates, and the age of the borrower. 

The new law also offers some additional protections for seniors. High fees and aggressive marketing have been cited as problems with reverse mortgages. Under the law, fees are capped at 2 percent of the first $200,000 borrowed and 1 percent of the balance, with a maximum of $6,000. In addition, the law prevents lenders from requiring borrowers to purchase insurance, annuities, or other products as a condition of getting a reverse mortgage. Lenders are also prohibited from working with other professionals who are trying to sell seniors financial products as part of the lending process.

In a related development, starting in 2009, the Federal Housing Administration will insure reverse mortgage loans for housing purchases in addition to loans for a current residence. This will make it much easier for seniors to use a reverse mortgage to buy a new home, as opposed to taking out money through a loan on an existing home.

This could be an option worth exploring for seniors who want to move closer to children or who have outgrown their current home.

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