The ice-cold real estate market makes this a poor time to sell a house, and suddenly-cautious lenders are making home-equity loans more difficult to obtain. Reverse mortgages are a third way for older home owners in need of cash to access the equity tied up in their homes. (Reverse mortgages typically are available to home owners age 62 and older.)

When a home owner takes out a reverse mortgage, he/she essentially converts a portion of his home equity into cash. The home owner can receive cash in a lump sum, monthly payments, a line of credit or some combination. When the home is sold, the loan must be repaid. Any remaining equity goes to the borrower or to his heirs.

During the home owner’s lifetime, no payments are due unless he moves out. Plus, no income verification is necessary to qualify for a reverse mortgage.

The catch: The biggest complaint with reverse mortgages has always been that they are expensive. Historically, up-front fees could run 5% to 6% of the home’s value, and all major reverse-mortgage programs have adjustable interest rates, so rates can go even higher.

What’s new: The federal Housing and Economic Recovery Act of 2008 includes provisions that make Home Equity Conversion Mortgages (HECMs), by far the most common type of reverse mortgage, a bit more attractive…

  • Loan origination fees on HECM reverse mortgages are now capped at 2% of the first $200,000 of the home’s value, and 1% of the remainder, with an overall cap of $6,000. This cap could save borrowers perhaps $1,000 to $2,000, compared with previous fee schedules.
  • The potential size of HECM reverse mortgages is increased. In the past, home owners could borrow no more than $363,790, and often the amounts were lower still, depending on home values in the region. The new law creates a national limit of $417,000, but this can rise to as much as $625,000 in certain high-value regions.
  • Reverse mortgage lenders are barred from engaging in certain questionable sales practices.
  • Example: Reverse mortgage lenders are prohibited from requiring the purchase of annuities and certain other financial products in connection with reverse mortgages — a strategy that rarely works in the home owner’s favor.

    Caution: Even with these laws, reverse mortgages are a pricey way to obtain money. A home owner should consider all other options before getting a reverse mortgage.

    Timing: These rules on reverse mortgages became effective on enactment in July 2008 and went into effect December 31, 2008, at which time the prior legislation expired.