With credit tight and loans harder to get, older people sometimes look to their homes as a way of cashing out their investment.
Loans known as reverse mortgages allow homeowners 62 and older to borrow against the equity of their home and suspend making monthly principal payments on their homes.
The advantage of such a loan is that it often enables people to stay in their homes, and mortgage payments on the home are suspended until the homeowner dies, moves or sells the home. With investment portfolios down, it can be a necessary way to access money to pay for medical or other bills.
There are downsides, too: It can be costly, because the interest rates are higher than for a traditional mortgage, and because the interest and fees accumulate and must be paid on the back end.
Though no hard figures exist on how many people are getting reverse mortgages, industry experts and brokers say demand for reverse mortgages has increased. So does a reverse mortgage make sense for you or your family? Here are some basic questions that might help answer that question:
What is a reverse mortgage, and who qualifies?
People who are 62 and older and own single-family homes and, in some cases, condominiums or cooperatives, can apply to take a loan against their home. It is a way of taking money out — in a lump sum, a monthly loan or as a credit line — without having to move or make regular loan payments.
Because no monthly mortgage is paid, the amount owed grows over time, particularly since the interest rates tend to run higher than traditional mortgage rates. The earlier you start a reverse mortgage — the younger you are when you start withdrawing equity — the more expensive it is, because you'll have to pay back in the end in terms of interest.
Principal and interest are not paid on the home until the owner dies, moves or sells the home. But the homeowner must continue paying for property tax.
How big a loan can I get, and how much will it cost?
The maximum loan amount has just been raised to $625,000, though the amount individual homeowners can borrow will depend on how much equity they have in the home and how old they are. Older homeowners can get more than younger borrowers.
Interest rates and fees can vary widely. Borrowers are urged to price-shop the entire cost of the transaction before finalizing the deal.
What happens to my regular mortgage payments?
Homeowners stop paying the principal and interest, but must still continue to pay property taxes. The monthly payments are suspended until the owner dies, moves or sells the home.
What if my children or heirs don't want to pay off the loan, and the house is sold by the lender for less than what is owed?
Children or other heirs are given the opportunity to pay off the loan (plus interest) and get the house back. If they choose not to, the lender will likely sell the property to pay off the debt.
Most of the loans currently being written are guaranteed by the Federal Housing Administration (FHA). If the lender sells the house for less than the amount owed, the FHA will cover the difference, so the debt will be retired in full.