PHILADELPIA — PHILADELPHIA -- Low interest rates have squeezed the incomes of some older people. But elderly homeowners can use their biggest asset to offset lost income.
A reverse mortgage lets older homeowners borrow against the equity in their homes, with repayment not due until they sell, move or pass away. Because the homeowner borrows the money, low interest rates provide a benefit.
Under a 2-year-old program of the Federal Housing Administration, 2,100 Americans have taken out reverse mortgages on their homes. The loans can be paid to the borrower in one sum, in monthly payments, through a line of credit, or by a combination of such methods. Borrowers must be at least 62, but half of the borrowers so far are older than 76.
The typical reverse-mortgage borrower is "house-rich and cash-poor," and the loans are typically most attractive to people who depend on interest income, says Ken Scholen, of the National Center for Home Equity Conversion, in Marshall, Minn.
Although reverse mortgages provide money now, he says, they consume the equity in your home, leaving less for you or your heirs later.
A reverse mortgage, like a regular mortgage or home-equity loan, is a loan secured by the homeowner's house. But the homeowner need make no payments to the lender while living in the house. A borrower may stay in the house indefinitely, even if the payments plus interest exceed the value of the house.
The loan is usually repaid from sales proceeds. So the amount that can be borrowed is limited by the value of the house or by an FHA-imposed limit, whichever is less. Interest will compound on the loan until it is repaid. So a homeowner cannot borrow more than the full limit. If the interest and principal exceed the value of the house, FHA insurance will pay the lender the difference. FHA premiums are built into the loan, at the rate of 0.5 percent of the outstanding balance each year.
The amount of the loan is also affected by the borrower's age, under the assumption that interest will pile up longer for a younger borrower. This means that an older borrower can borrow more than a younger one. (When a couple borrows money, all calculations are based on the age of the younger person.)
Interest rates also have some effect.
For instance, the index used to determine how much may be borrowed under the FHA reverse-mortgage program is linked to 10-year Treasury securities. Two years ago, that index was 10.20 percent; recently, it was 8.95 percent.
FOR MORE INFORMATION: A free copy of "Home-Made Money," a booklet written by Ken Scholen, is available by writing to Home-Made Money, AARP Home Equity Conversion Service, 1909 K St. NW, Washington, D.C. 20049.