Reverse Mortgage Insider Has Some Advice for Senior Citizens on Using These Loans

July 31, 2009 - I was contacted recently by a freelance writer who wanted to get some dirt on reverse mortgages. He said he could find people all over the place who could sing the praises of the reverse mortgage, but he wanted to find someone who could give him the pitfalls and things to watch out for. This got me thinking…there are a number of times I do not recommend the usage of a reverse mortgage and there are several things to watch for, but I would not necessarily call them “pitfalls.”

A reverse mortgage is a complex financial transaction and it is not an inexpensive loan, but when used correctly and under the right circumstances, it can greatly enhance the lives of the senior borrowers who obtain one.

So my advice to senior borrowers revolves around education and not the ominous “beware” tone that it appeared this writer was prepared to take.

Choose Option to Meet Need

First, I say to borrowers, "Choose the correct option to meet your needs."

Borrowers can choose a fixed rate or an adjustable rate and fixed rates sound great, but they are what is called a “closed end instrument” and require the borrower to take the entire loan at the very beginning of the transaction.

For borrowers who are paying off an existing mortgage and need all their funds to pay off the current loan, this is no problem. For a borrower who has no current lien on their property or a very small one, this would mean that they would be forced to take the entire eligible mortgage amount on the day the loan funds.

This might give a borrower $200,000, $300,000 or more in cash from the very first day that they do not need at the time and on which they are accruing interest. This can also have an adverse affect on some seniors with needs-based programs.

Seniors on Medicaid and some other needs-based programs would impact their eligibility by having the sudden addition of the liquid assets and the senior would wind up funding their own Medicaid with the equity in their home.

For these seniors, a careful consultation with family members and a financial counselor is advised to be certain that they chose an option such as the line of credit where funds can be made available to them during times of need, but they never have excess funds sitting in accounts to affect their eligibility.

A borrower who is planning on using only a portion of their funds monthly need not pay interest on the entire amount from the very start, eroding the equity unnecessarily fast. An adjustable rate will accrue interest at a much lower rate at today’s rates, but has a 10% cap and can go much higher if rates rise in the future. However, the adjust rate program allows for more options for borrowers to receive their money.

They can choose a lump sum; a line of credit against which they can draw at any time and which cannot be frozen like many of the bank Home Equity Lines of Credit (HELOC’s) are going through now and which grows on the unused portion annually; a monthly payment for a set term or for life; or a combination of all of the options. The adjustable rates are currently much more flexible to meet borrowers’ needs.

One of the things that can determine the amount for which borrowers will ultimately qualify is the rate at which the loan accrues interest. When the margins on the adjustable rates were lower and the fixed rate was higher, the adjustable rates gave borrowers more money in their pockets in the form of eligibility.

Now, most borrowers we run through the reverse mortgage calculator receive more money on the fixed rate program. This is extremely important to know if you are trying to get as much as possible to pay off an existing lien. It also means that the higher the margin, the less money the borrower will receive and the faster interest on the loan will accrue.

So the thing to look for in a reverse mortgage here is definitely the rate on a fixed rate or the margin on an adjustable rate that is being quoted.

Watch for Fees Being Charged

Another thing seniors need to look out for in their reverse mortgages is the fees being charged. The fees are highly regulated by HUD and therefore, the lenders cannot charge fees like processing fees, administration fees and things like that, but there are some things borrowers can watch to help themselves!

First is the servicing fee. The amount of the servicing fee will determine the servicing set aside, which ultimately determines how much money goes to the borrower.

The servicing fee set aside is not a fee at the time you close your loan, it is money that is not made available to you and is left in the equity of your property that is meant to go toward the payment of the monthly servicing fee.

On a regular or forward mortgage, you don’t see this fee, you simply pay anywhere from .25% to .50% higher rate which goes to the servicing company and is built into the rate you pay.

Reverse mortgages use a flat dollar amount instead, and the set-aside is determined up-front due to the fact that the balance of the loan is increasing, not being paid down by the borrower.

The maximum origination fee is set by HUD, but they do not require every lender to charge only the maximum! Check around and see if you might be able to get a better origination fee.

Watch for Long-Term Annuity Pitches

Finally, one of the biggest things for seniors to watch out for with their reverse mortgage has nothing to do with the actual mortgage at all…it’s becoming aware that there are those who are going to try to get you to part with your money!

Do not consider investment strategies which include long term annuities which will not allow you access to your funds for long periods of time without penalty.

Be wary of reverse mortgage originators who seem overly-anxious to help you invest your loan proceeds. Always remember that this is your home equity and with some careful stewardship, it should take care of you but if not guarded, can be taken away, leaving you with a loan on your home and nothing to show for it.

It seems most of the time I see a “reverse mortgage horror story” it is usually due to what happened to the money and not the reverse mortgage itself. With some careful planning by the senior borrowers, getting the family and/or a trusted financial advisor involved and knowing what to watch for, a reverse mortgage can be a viable retirement tool for many borrowers.

It’s just a matter of making sure you put the seniors’ best interest first and knowing what to look out for when doing reverse mortgages for senior homeowners that keep those horror stories from happening in the first place.

Source

SOME FINANCIAL ADVICE ON THE QUESTION OF REVERSE MORTGAGES

Peter and Lana have seen the TV commercials about reverse mortgages. They were wondering if it would be a good way to go to help ease their current financial situation.

A reverse mortgage is simply an advance on the value of your home that accumulates interest. The accumulated debt does not need to be paid off until you die, sell the home or move out of the house. If you qualify, and are over the age of 62, you can get up to 30% of the value of your home and you can do whatever you want with the money. According to information, a reverse mortgage delivers the cash tax-free. Of course, if the money is used to invest and produce an income, some or all of that income will be taxable.

It is very important to understand the cost of a reverse mortgage before getting into one. Information obtained states that there could be an administrative fee of about $1,300 to set up your plan or more. On top of that, you will be able to choose a term of six months, one year or three years to determine the interest rate on your loan. Rates, of course will be subject to change at the end of the term. Interest is compounded semi-annually.

For example, if Peter and Lana get a reverse mortgage for 30% of the value of their $250,000 house and choose a three-year term (7.50% on Sept. 13, 2005), they would get $75,000 today to do as they please. Don't forget the $1,300 set up fee. Lana, at age 62, has a life expectancy of about 24 years. At that time, assuming no change in interest rates, the amount owing will have grown to over $439,026.

In spite of escalating home values over the last several years, they haven't appreciated in value much more than the rate of inflation over long periods of time. If we assume an inflation rate of 3% their home may be worth about $508,199 in 24 years. That leaves only $69,173 after paying off the loan. A contract clause found, states that "as property values decrease, the amount to be repaid is never more than the fair market value of the property at the time it is sold".

There are other ways to get money out of your home. You can sell it and buy something smaller. A home equity line of credit at much lower interest rates may also be a possibility. Talking with a Certified Financial Planner and exploring other ways to create income might be your best investment. It appears a reverse mortgage is great, if you have no one to leave your equity to.

Source

Advice To Seniors Considering The Reverse Mortgage

Leading Expert Offers Tips On What You Need To Know

ONTARIO, Calif., April 21 /PRNewswire/ -- Today's senior citizens have spent their lives building a family nest egg to ensure they can pay the bills after they retire. Despite the diversification in their portfolios, losing nearly half of their life savings has put older Americans in a panic about their financial futures.

(Photo: http://www.newscom.com/cgi-bin/prnh/20070717/NYFNSC02)

Although seniors live robust lives, well into their nineties, many are worried they do not have 20-30 years to recover their lost savings. With talk of deflation and predicted hyperinflation it is prudent for our parents and grandparents to consider the next steps to remain financially independent through the coming years, says Frank N. Darras, the nation's leading disability and long-term care insurance lawyer. See www.darrasnews.com.

"The increasingly popular reverse mortgage has been shopped by lenders and targeted to homeowners over 62. This is a special mortgage that lets seniors convert equity in their homes into cash," says Darras. "This may be a viable option but it is not without risk."

Here is how it works:

Today's reverse mortgages are called Home Equity Conversion Mortgages (HECMs) and are insured by the Federal Housing Administration. HECMs allow senior citizens to tap home equity and not have to make monthly payments. According to HUD, the HECM is considered a safe plan that helps senior citizens have greater financial security. See http://tinyurl.com/q4o97.

"It pays to be very careful," warns Darras. "Even when the government is promising a reverse mortgage is a safe bet, there is a lot to know and it is important for folks to examine the fine print."

There are costs associated with an HECM. The lender can charge up to $2500 in origination fees and although capped at $6000, that is a lot of cash to come up with on a fixed income. Rolling that fee into the reverse mortgage can be painfully expensive. In addition, you will be charged closing costs, Mortgage Insurance Premiums, servicing fees and interest, says Darras.

"Make sure you crunch all numbers and after you see the upfront costs and remember, you are still responsible for property tax and hazard insurance. Work with a trusted advisor to uncover all potential expenses and the trappings of a reverse mortgage," says Darras.

Most importantly, don't let fear and the lure of an easy solution drive your decision. Even though new legislation and lower interest rates promise to make it less expensive to borrow, it can cost you in the long run, if you are not careful, says Darras.

"No matter what, the loan will have to be repaid somehow, in full. Usually that occurs when the homeowner dies. Understand other restrictions could cause premature payback of the loan so make absolutely sure you know what you are signing," says Darras.

Source

Retirement planning is still important; some of the advice has changed

Ron Melancon lost his job a year ago in February, dipped into his 401(k) savings plan to pay his bills -- and put saving for retirement on hold.

The Henrico County resident is 44, married with two children -- and at that stage in life where he needs to get serious about retirement. Yet, he can't even think about it.

"I'm focusing on paying bills," said Melancon, who worked for 14 years at Hecht's, then Macy's at Regency Square Mall in Henrico County.

Melancon, who was out of work for six months, paid income taxes and a penalty for early withdrawal on his 401(k) money.

He begrudges the penalty, claiming he is not relying on government assistance. "I'm trying to be financially responsible," he said.

Melancon isn't alone in pushing back retirement plans.

More people are rethinking retirement, as the stock market struggles, pensions disappear and the future of Social Security remains questionable.

"These are troubling times," said Matt Thornhill, founder and president of The Boomer Project, a mar keting and research company in Richmond.

The volatile stock market may be a wake-up call to baby boomers, people born between 1946 and 1964, who have been good at spending but not saving, Thornhill said.

They can't rely on their deferred retirement plans to bail them out any time soon, he said.

"The stock market hits a record high 100 percent of the time, but it may take five, seven or 10 years before we get it back to where it was two years ago."

In 10 years, if the market does take that long to recover, the oldest boomers will be 72, well past the traditional retirement age of 65.

Besides savings and investments, the other major elements of retirement funds are pensions and Social Security.

What's a person to do who expected to retire in five or 10 years?

We asked Thornhill and local financial planning experts.



Flight to safety

One of the safest investments is an annuity, which guarantees income for the rest of one's life, Thornhill said. Annuities are contracts sold by life insurance companies for fixed or variable payments at retirement. All proceeds remain in the annuity and accumulate tax deferred.

The investments were unpopular during the booming stock market, because they didn't offer the opportunity for much growth. Plus, they can be expensive, since they come with fees and commissions.

"They may not pay the highest interest, but safety comes with a price," Thornhill said.

Consider, for example, if you put $100,000 into a mutual fund a year ago, most likely it would be worth $50,000 today. That same $100,000 in an annuity would still be $100,000.

Annuities are on their way back, said Michelle Oliver, president of The Oliver Financial Group in Henrico County. "They are becoming popular."

Investment tip: If you want $25,000 a year in lifetime income payments, you need to invest $325,000 in an annuity -- or 13 times the annual income, according to Bill Losey, author and financial planning expert on CNBC's "On the Money."



Paying off the house

The No. 1 issue in retirement is cash flow, said James Cox, managing partner at Harris Financial Group in Colonial Heights.

"I have yet to find a retiree who has regretted having no mortgage," he said.

"The principle reason why you don't have a mortgage is peace of mind," Cox said. "The point of retirement is not to have to work."

One basic rule of retirement is that people need to live on 70 to 80 percent of their pre-retirement income. But if the mortgage is removed from the equation, the need for income is less and cash flow is cleaner, Cox said.

In general, people should plan to pay off their mortgage loans when they're in their 50s, he said.

Some financial planners have argued that equity in a house is a dead asset, so it made more sense to take the money out of the house and invest it.

"Ask that same question today," Cox said. "If all your money was invested, you may not lose just your investments but your house too."

While some people keep their mortgages to write off the interest on their income taxes, taxpayers with older loans only get a marginal benefit, Cox said.

The further along borrowers are in paying off their mortgages, the less interest they pay and the more likely they are to take the standard deduction.

Some financial planners tout reverse mortgages, which are government-backed loans, as a way to pump up monthly income for people with equity in their homes but little income.

"It's a life raft for seniors," said Robert Shahda, Richmond branch manager of Seniors First, reverse mortgage specialists.

A reverse mortgage is a line of credit against the equity in one's house. It can be paid in a lump sum or in monthly amounts. If more is owed than the house is worth when the borrower dies, insurance covers the difference.

"They are government-insured, there is no risk of foreclosure, no income requirements and no credit requirements," Shahda said.

To be eligible, people must be 62 or older and they need at least 50 percent equity in their home. The older the homeowners, the more money they can borrow.

A reverse mortgage may be a solution for people who run out of money, Cox said. But borrowers should be careful, he said.

"I get queasy when someone mentions a reverse mortgage," Cox said.

Another solution may be to sell the big family house, buy a small house and use the money from the sale as income, he said.

Investment tip: Pay off the house, put the extra money toward retirement savings.



Pensions

Company-paid pension plans have become rarer over the past two decades, replaced with deferred compensation plans as the main source for retirement funds.

Deferred plans, such as 401(k)s, shift responsibility from the company to the individual.

But the Richmond area is still rich with pensions through state employment and companies such as Verizon, Dominion Resources, Honeywell and Altria. All still offer pensions to their employees.

The Pension Benefit Guarantee Corp., a federal corporation, protects the pensions of nearly 44 million American workers and retirees in more than 29,000 employer-benefit pension plans.

"To the extent the PBGC is solvent, the person has a backstop," Cox said.

But it could be just that, a backstop and not the assurance that a company may have provided.

A classic example is Bethlehem Steel Corp., which filed for bankruptcy protection in 2001. PBGC in 2002 took over the plan, which was underfunded by billions of dollars, and assumed responsibility for paying pension benefits to 95,000 workers and retirees.

PBGC changed the terms of the deal, leaving some employees without the promised pension and all without health-care coverage. It also cut benefits.

"Every participant should review the summary plan descriptions of their plans," Cox said. "It will tell you precisely what portion of your benefits is guaranteed."

Some pension plans allow a cash payment equal to the value of a monthly annuity or a lump sum distribution.

"I would rather have my money invested in a fixed annuity or at several banks," Cox said. The Federal Deposit Insurance Corp. insures deposits up to $250,000 for a single account owner.

Investment tip: Consider a lump sum payment if you are concerned about the long-term viability of the pension plan.



Investments

Your 401(k) plan is in the tank. Whose isn't?

Still, you can protect yourself from unnecessary risk, investment advisers say.

The most common mistake people make is to concentrate their assets in their employers' stock, Cox said.

Most plans allow contributors to diversify their investments. Reduce risk by using the investment options offered in the plans, he said. Again, don't concentrate in one asset class.

Invest in value and growth companies, small to large companies, and domestic and international companies. Growth stocks have the potential to increase earnings at a faster than average rate. Value stocks are priced low relative to earnings potential or assets.

Continue to contribute, Cox said. "People who stop and start miss all the benefit when the market goes up. Keep contributing the maximum amount."

It's a good time to buy cheap and be in a position to benefit when the stock market recovers.

"Investors stand to make a lot of money over the next three to five years," said J. Saunders "Sandy" Wiggins, principal at The Actuarial Consulting Group, a retirement and investment consulting firm in Midlothian.

It's important to have an investment plan and stick with it, even during these volatile times, Wiggins said.

The closer a person is to retirement, the more conservative they should be, although even that approach hasn't worked in this market.

People who couldn't stomach the market and took their money out a few months ago will miss the rebound, he said.

"If emotions are involved, people will be inclined to sell when they should be buying," Wiggins said.

"The most important thing people can do is to be very careful about how they let their emotions influence their investment decisions. A wrong decision can cost thousands of dollars 10 years down the road."

Those who sold out might want to get back in, Wiggins said. "When the stock market moves, it usually moves big."

Oliver said everyone's risk tolerance is different. "Some clients are still putting money into mutual funds, because they know it's a great time to purchase."

But many older clients have moved out of the market and into bonds, money market accounts and more cash positions, she said.

"The last thing you want to do is put a client into something they can not tolerate," she said. "That would make for an angry client."

Investment tip: Subtract your current age from 110. If you are 65, allocate 45 percent of your portfolio to equity investments and 55 percent to fixed-income investments. More conservative investors might want to subtract their age from 100.



Social Security

The typical Social Security payment equals about one-third of income needs for most retirees.

The good news is Virginia does not tax the benefit.

But how much longer they will be around is anyone's guess.

"I can't speak to the solvency of the benefit," Cox said. "Who knows how the laws will be changed?"

What is probable is Social Security taxes paid by current workers will rise and benefits will fall.

"Baby boomers probably will not endure the pain of lower benefits," he said.

Consider, for example, that 60 percent of boomers have individual retirement accounts. When the oldest boomers turn 70½ in 2016, they will start to take money out of their IRAs and that money will be taxed.

"The tax revenues from future required distributions are pretty impressive," Cox said. The money could help fund Social Security and keep it solvent.

"Baby boomer funds represent the biggest potential tax revenues the world has seen. All that money in IRAs and 401(k) plans has to start pouring out."

Source