Tapping home equity to finance your golden years is a strategy that's growing in popularity. The housing law signed by President Bush this summer raises the amount seniors can borrow using federally backed reverse mortgages and lowers the cost of getting the cash. Here's what you need to know about the new rules for reverse mortgages:
• Instant cash has strings. A reverse mortgage is a loan against your home's value that doesn't have to be paid back as long as you live in that house. Generally, you have to be 62 or older to be eligible for one. After paying a variety of fees, you can get a lump sum, monthly payments, a credit line, or a combination of these options. When the home is sold, the loan must be repaid with the proceeds. Any remaining equity goes to the borrower or heir.
• Know the limits. Most reverse mortgages are home equity conversion mortgages backed by the Federal Housing Administration, so you'll still get your money even if the lender goes under. The new housing law creates a national loan limit of $417,000, but it can rise to as much as $625,500 in high-cost areas. The previous range was $200,160 to $362,790.
• Avoid fees. In a 2007 AARP survey, 69 percent of reverse mortgage borrowers found the costs to be high. The new law limits origination fees to 2 percent on the initial $200,000 of the home's value and 1 percent on the remaining balance, with an overall cap of $6,000.
• Get counseling. To qualify for an FHA-backed reverse mortgage, you must discuss the loan with a federally approved counselor employed by a nonprofit or public agency. The session should be low-cost or free. "You should...be very forthcoming so that the counselor can help you [make] sure that a reverse mortgage is really the answer for you," says Peter Bell, president of the National Reverse Mortgage Lenders Association. You can find a local housing counseling agency by calling (800) 569-4287.
• Be wary of sales pitches. Some lenders have tried to sell clients financial products that may be unwise investments. The new law prohibits requiring the purchase of annuities and other financial products in connection with a reverse mortgage.
• Keep up the house. Even after taking out a reverse mortgage, you're still responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. "If there is hurricane or flood damage to the home that you can't repair, the loan is due," cautions Prescott Cole, an attorney and elder-care advocate. "If you can't repay the loan, you will lose your house."
• Don't move. If you sell your home or no longer use it as your primary residence for 12 months in a row, you or your estate will have to repay the cash you received from the reverse mortgage, including interest and fees. Says Barbara Stucki of the National Council on Aging: "If you can't stay [in the] home for quite a few years, then it's a bad deal."