As of the first of the year, older homeowners can tap into a larger portion of the equity in their homes with a reverse mortgage because of new, higher federal loan limits, according to the National Reverse Mortgage Lenders Assn.
Although growing in popularity, reverse mortgages remain an unknown financial product for a lot of elderly homeowners. But if you're 62 or older and find that you are cash poor and house rich - meaning you have a lot of equity in your home, but little or no savings - this is a product that's worth looking into. Or maybe you have some savings but don't want to touch that pot of money.
This type of loan allows seniors to pull out the equity in their home in the form of a loan without selling or giving up title. The best feature: The loan doesn't have to be repaid until the homeowner moves, sells or dies. When the loan is repaid, any remaining equity is distributed to the borrower if he or she is alive or to the late borrower's estate. In addition, the repayment amount can never exceed the value of the home.
Borrowers can take the loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination of these. And because the money received is in the form of a loan, it's not considered taxable income, which means it won't affect your Social Security or Medicare benefits.
But there is a catch. With a reverse mortgage, the amount of money you can borrow depends on your age, the current interest rate and other loan fees. It also takes into account the appraised value of your house and the mortgage limits for your area set by the Federal Housing Administration.
According to the association, the changes affect two products: the federally insured Home Equity Conversion Mortgage (HECM), which accounts for 90 percent of all reverse mortgages made in the U.S.; and the Fannie Mae Home Keeper loan.
I like reverse mortgages. They give homeowners a lot of flexibility and, increasingly, aren't just being used by cash-strapped seniors.
To get an estimate of how much you might get in a reverse mortgage, check out AARP's "Reverse Mortgage Calculator" at www.rmaarp .com. AARP is an extremely useful and unbiased source of information on reverse mortgages. For more information go to AARP's Web page on this topic at www.aarp.org /revmort, or call (800) 209-8085 to order a free copy of "Home Made Money: A Consumer's Guide to Reverse Mortgages."
- Michelle Singletary is a columnist for The Washington Post.