Financial Q&A: How a bank failure affects CD interest

Submit your questions to Steve at: money@csmonitor.com

Q: Does the FDIC cover interest due on a $1,000 bank certificate of deposit if the bank fails before the CD matures? Or, if the interest is paid only at maturity, and the bank fails before maturity date, have I in effect given the bank an interest-free loan because FDIC will only repay my initial deposit?

L.M.C., via e-mail

A: If a bank fails before a CD’s maturity date, you would be entitled to the principal and interest accrued up to the date the bank failed as long as the total does not exceed the FDIC insurance limit, according to an FDIC
spokesman.
Currently, the FDIC covers deposits up to $250,000. Savers who are bumping against the FDIC limits may want to discuss with the institution a strategy whereby accrued interest would be periodically swept to a different account under a different registration. [Editor’s note: The original answer misstated the FDIC’s policy on accrued interest.]

Q: A year ago, I took out an interest-only mortgage as a bridge loan on a second home while I waited for my first home to sell. The loan cost is high, but I was assured by my Realtor and lender that it would be very short term. The first house, in a prime lake area, also has a mortgage and still hasn't sold. The home has over $500,000 in equity. My intention was to pay off or maintain a mortgage of less than $50,000 on the house that I moved into. Currently, however, my IRA is falling dangerously low as I have had to take out money to pay these loans. My lender suggested that I go into default and start foreclosure. That is against all my principles. If I could get at some of my equity, that would be great. I have already been told I cannot refinance because I don't have enough income.

L.S., via e-mail

A: With $500,000 of equity in that home, San Antonio-based certified financial planner Joseph Montanaro sees several options.

First, you could use a home equity line of credit. You could tap this line of credit to help make the interest-only payments on your second home. Although this isn't particularly appealing because you're using debt to pay debt, it might help from a short-term cash-flow perspective until you're able to sell your lake home.

If you're 62 or older and can move back to your original home, you could explore a reverse mortgage to tap the equity in your lake home. This would provide a stream of income without requiring repayment (until you sell the home). But relative to other types of loans, Mr. Montanaro says that option is expensive, and it also doesn't provide a lot of income relative to your $500,000 of equity.

Other options to consider:

• Put both properties on the market. Your second home might sell more quickly than your first, which would leave you with only one mortgage payment.

• Continue to use funds from your IRA to fill the gap, eventually replenishing your nest egg with sale proceeds from your lake home.

• Consider "unretiring" until the situation is resolved. More income would help on all fronts.