Unlock your home's value

NEW YORK (CNNMoney.com) -- Tapping into your home's value isn't easy - especially if you want to keep living there.

Reverse mortgages, which pay money to home owners based on the values of their homes, seem like a good answer. These loans, however, come with strings not to mention costs.

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Now, there's a new twist from Circle Lending - one where the lenders are family or friends.

Reverse mortgage are growing in popularity. According to the Federal Housing Authority, they tallied just 6,640 in 2000 but rose to 74,412 in 2006.

In conventional, federally insured reverse mortgages, homeowners receive either lump-sum payments or monthly checks from lenders. Repayment of the money borrowed, plus interest, is delayed until the homeowner dies or sells the house.

Homeowners like reverse mortgages because they can stay in their homes as long as they are able. But the loans have several drawbacks and limitations:

• They can be quite costly. There are origination fees and normal closing costs. There's also, usually, a 2 percent insurance premium. That's to guarantee the lender that it won't lose money on the deal. All told, the expenses add up quickly, typically to between $8,000 and $20,000.
• Borrowers must be at least 62 years old.
• The loans can only be made on a primary residence, not on vacation or investment properties.
• Lenders don't normally loan much more than half of the house's value.
• Borrowers must meet with a counselor approved by the Housing and Urban Development agency to make sure they understand the transaction.

Circle Lending calls its version of reverse mortgage Family Advantage and describes it "as a line of credit funded by the relatives or friends of a homeowner and secured by real estate."

The arrangement retains the advantages of conventional reverse mortgages and eliminates many of their costs, restrictions and drawbacks.

Using Family Advantage, homeowners pay just $3,999, a big savings compared with conventional reverse mortgages.

With a convential loan, a 72-year-old homeowner living in a metropolitan area in a house valued at $560,000 would be able to receive up to $226,000. The fees would come to $7,230 for the origination fee, $7,230 for the insurance, $4,000 in closing costs and $30 a month for servicing. That's a total of $18,460.

With Family Advantage the homeowner could get as much as the entire $560,000 if the lender agrees. It would cost just the flat fee of $3,999, plus a charge of $19 for each disbursement made, which could be a one-time payment or done monthly, quarterly or annually.

Under Family Advantage, there are also no age restrictions and can be made on second homes.

Basically, instead of selling the house to the bank, little by little, the owner is selling it to a friend or relative.

"[It] enables the homeowner to receive cash knowing that a relative or friend - not an institution - is building equity in the house," says Asheesh Advani, CEO of Circle Lending.

The idea came to Advani when he was working at the World Bank. That experience exposed him to peer-to-peer lending, common in many parts of the world.

With Family Advantage, the company provides all the documentation needed, performs a title search, administers the loan and keeps complete records of the loan.

But one of the biggest advantages to going through Circle Lending to arrange this type of transaction, is that it provides a legal framework for the participants.

"It's all well documented and very clear," says Jim Smith, vice president of marketing and sales for Circle Lending. It puts things on a business-like footing, which can be important for avoiding potential conflicts that often arise in loans between friends or relatives.

Keith Gumbinger of HSH Associates, which publishes information about mortgages and other financial matters, says arranging a family loan through a company like Circle Lending can be beneficial for both parties.

"Formalizing the agreement provides a clear outline of the responsibilities of both the lender and the borrower," he says.

Homeowners also feel less like they're depending on their relatives for help. A less formal arrangement may feel like charity rather than a business arrangement.

The terms of repayment are also clear cut. With Family Advantage, or any reverse mortgage, the loan repayment is taken before the estate is calculated; it's not part of the estate's assets. Circle Lending handles the distribution of the repayment, no muss, no fuss.

With Americans amassing huge amounts of home equity while saving comparatively little, the importance of reverse mortgages is bound to grow over the next years.

This new wrinkle on reverse mortgages will give them another option to consider when they looking for ways to augment their retirement income.

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