mortgage

Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50% of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60% or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5% of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60% face a premium equal to 2.5% of the home’s value. That’s in addition to a 1.25% annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.