Better think twice

Don’t make these critical mistakes with your nest egg, even if times are tough 

Recession or not, these are fast becoming hard times, and hard times can lead to bad decisions.

Recently, the Financial Industry Regulatory Authority warned investors to think twice before taking steps that might compromise their nest eggs, such as taking out a reverse mortgage, getting a 401(k) debit card, or cashing in life insurance policies to weather tough financial times.

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Make Sure a Reverse Mortgage Is Right for You

Reverse mortgages, which enable seniors to borrow money against their homes that won’t get repaid until after they move out or die, can be useful tools.

But they aren’t foolproof. These increasingly popular loans are also the subject of many consumer complaints.

Los Angeles resident Stephanie Hodal is a case in point. She was disgusted with a telemarketer who called her parents’ house on a Sunday morning in early 2006. Hodal happened to be around to answer the phone.

In a friendly, patronizing and polite tone of voice, the telemarketer said she came from a government sponsored program called CFI that would enable seniors to turn the value in their properties into cash.

The telemarketer asked about the weather and how Hodal was feeling, as though she were an old friend calling instead of a salesperson. She said Hodal’s parents had responded to a solicitation and made a request for further information about the reverse mortgage program, although Hodal isn’t aware of them having done so.

When Hodal asked the telemarketer for detail about CFI, she got evasive answers.

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Your legal rights: The real deal on reverse mortgages [Minnesota]

With the cost of everything going up - from living expenses to health care to utilities - many senior citizens find themselves financially squeezed like never before. And with the baby boomers growing older, there are a lot more senior citizens than ever before.

Seeing these trends, some companies are marketing the “reverse mortgage” as a way for seniors to convert some of the equity in their home to cash to pay other bills. Reverse mortgages are now a $20 billion industry.

For some seniors, a reverse mortgage may be a suitable loan, but for others it is not. If you are considering a reverse mortgage, be sure to find out the “pros” and the “cons.” Carefully evaluate whether a reverse mortgage is suitable, given your needs and circumstances, and consider whether there are other alternatives that may be more suitable for you. Steer clear of predatory lenders and scam artists who may want to steer you into a high-cost loan or sell you a reverse mortgage in order to get at your money.

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Ginnie Mae Ramps Up Securitization of Reverse Mortgages

An emerging area of the secondary market appears to be gaining steam, even as a large part of the private-party securitization market remains in the deep freeze. That emerging area? Reverse mortgages, of course.

Ginnie Mae said Friday that Financial Freedom, the reverse mortgage lending subsidiary of IndyMac Bancorp Inc., has issued two fixed rate reverse mortgage transactions and one LIBOR transaction under Ginnie Mae’s Home Equity Conversion Mortgage Mortgage-Backed Securities, or HMBS, program. The $177 million fixed rate issuances and the $104 million LIBOR issuance are among the first MBS pools backed by FHA-insured fixed rate and LIBOR reverse mortgages.

The three pools pushed the Ginnie Mae HMBS program to $648 million in issuance, the agency said in a press statement.

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The same old story: living to 90 a risky business [Australia]

Australians have the second-longest average life span among the people of the 30 nations that make up the “rich country’s club” — the OECD. Only the Japanese live longer.

Today’s average life span of an Australian at birth is about 81 years — some 25 years longer than a century ago — and rising.

Many Australians — especially baby boomers now leaving the paid workforce or already retired — are surprised when they learn about their own life expectancy.

In a report enticingly titled Beyond Three Score Years and Ten: Prospects for Longevity in Australia, Heather Booth and Leonie Tickle point out that on average a woman aged 50 years has the prospect of a further 38.8 years of life and a man 34.4 years. Among baby boomers, 52 per cent of females and 34 per cent of males can expect to see out their 90th birthday.

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The entire box and dice [Australia]

It’s nice to share the wealth but grandfathering the children could do them a world of harm, not good.

Baby boomers aren’t doing their adult children any favours by being overly generous when helping them into their first home, advisers say. Instead, they’re financing them into overvalued property that may become a millstone.

Financial planners and property investment advisers say older baby boomers have done well out of property and are retiring with large sums of tax-free money in the superannuation system.

At the same time, they’re concerned that high prices mean their children aren’t getting a foot on the property ladder. As a result, some parents are handing over tens of thousands of dollars for home and investment property deposits - in some cases leaving themselves short in retirement.

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Choice is reverse vs. regular mortgage

Question: I’ve been hearing a lot about reverse mortgages and I would like to know who to contact to find out more information. We live in Arlington and are both retired but want to stay in our home as long as possible with out added expenses. Can the money be used for anything? If taken as a lump sum, do we have to pay income tax on this money?

W.R., Arlington

Answer: First, let me give a quick explanation of how a reverse mortgage works. It is a special loan program that allows older homeowners to pull cash out of their home without making payments. As its name implies, a reverse mortgage is the opposite of a regular mortgage.

Instead of borrowing a sum of money and paying it back over time to reduce the debt, with a reverse mortgage, a sum of money is given to the borrower but no payments are made and debt grows larger and larger each year. The equity can be pulled out of the home either in a lump sum or paid out gradually in guaranteed monthly payments for life. The unpaid interest is added to the loan balance each month. The total loan balance, with accumulated interest, is eventually paid off when the home is sold, typically after the owner’s death.

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Reverse mortgages gain popularity as the population ages

Patti Combs says she sleeps better since she swapped her traditional mortgage for a reverse mortgage two months ago.

“It’s a tremendous relief,” she said. “Each month I had to dig into my savings in order to pay the mortgage. When that well ran dry, I would have been a candidate for foreclosure or had to sell my beloved home at a depressed price.”

Now she doesn’t have to worry about the monthly payment, which was $2,800 just for principal and interest. She won’t have to pay back a dime until she moves out of her waterfront home in Treasure Island.

Combs, 79, is one of thousands of homeowners riding a new wave of interest in reverse mortgages, which are available only to people 62 or older.

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Force out: Here’s what triggers due-on-sale clause in reverse mortgage

Question: Regarding reverse mortgages, if one spouse remains in the home while the other moves to an assisted living facility, does this trigger the due-on-sale clause? Also, I assume that in-home nursing care counts as “still living” in the home, but I want to make doubly sure.

Answer: The age of the “trailing” spouse is key here. With a couple, both owners must be 62 to qualify for a reverse mortgage. If both owners are 62 or older and one leaves for whatever reason, the loan need not be paid back until the other owner also leaves.

If one owner is younger than 62, he or she must be removed from the title before the other can obtain a reverse mortgage. Therefore, if the remaining owner leaves the property permanently, the loan becomes due and payable.

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Rethinking Reverse Mortgages

Reverse mortgages — a way for seniors to tap into their home equity without having to make monthly payments — have become a mainstream retirement-planning option in recent years. Despite some drawbacks, for many retirees, a wisely chosen reverse mortgage has helped fund a comfortable, active retirement when savings and pensions alone weren’t sufficient.

But recently, the reverse-mortgage picture has gotten very complicated.

Consider: The conventional wisdom around reverse mortgages has long been that retirees should wait as long as possible before taking one. There are two reasons for this:

  • Reverse mortgages usually have an actuarial component, meaning that the lender looks at your likely remaining life expectancy when deciding how much to lend you. The older you are, the better your chances of getting more money. More money is good.
  • Historically, houses have appreciated over time, so that (according to the conventional wisdom) the longer you wait, the more equity you’ll have. The more equity you have, the more money you can get.

You see the problem, don’t you? (If not, read that second bullet point again. It’ll come to you.)

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