How lenders recoup For their part, lenders recoup principal, plus interest, in one of several ways. If a borrower cashes out the entire balance of available equity and then dies or moves out, for example, the lender can obtain and sell the property. If the amount withdrawn turns out to be less than the full market value of the home, the house can be sold, the balance paid off and the remaining equity returned as cash to the borrower or surviving heirs. Finally, if the heirs want to hold on to the property, they can pay the mortgage off with their own money. At the end of the loan term, either the borrower or the estate should be able to deduct the interest portion of the mortgage balance from their taxes.
Experts suggest consulting a tax adviser on that point.
With HUD loans, which are offered through the agency's Federal Housing Administration arm, it's possible for borrowers to take out more money than the home is worth. That's because HUD gradually increases the size of borrowers' lines of credit as they age. A homeowner who lives longer than average can keep taking money out, ending up borrowing more than the home's value. If that happens, though, neither the borrower nor the heirs is responsible for the excess. Borrowers pay a little money upfront into an insurance fund to cover that possibility.