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Guarding Your Wealth for Seniors
The Ins and Outs of Reverse Mortgages
By Jeffrey D. Voudrie, CFP
President,
Legacy Planning Group
Sept. 28, 2005 - Reverse mortgages have been around
since 1989, but they are rapidly gaining in popularity. The complexity
of reverse mortgages makes it difficult for the average senior to
separate myth from reality. Let me help you decide if one is right for
you.
I believe that the reverse mortgage can work
effectively for seniors in the right situation. I’m also concerned that
they are being heavily promoted to seniors who shouldn’t be using them.
Last week, I explained the ins and outs of interest-only mortgages and
how they can be a valuable tool for some seniors. I also warned readers
against the option-ARM mortgage. Those articles can be found at
www.guardingyourwealth.com.
The number of reverse mortgage originations doubled
between 2003 and 2004. These numbers may continue to double each year.
The media is filled with sales pitches for these mortgages, promising
easy money and painless solutions to senior’s financial problems.
You must be at least 62-years old to get a reverse
mortgage. They are designed to help financially strapped seniors meet
their living expenses and to stay in their home. A reverse mortgage
allows the homeowner to tap into their home equity without having to
make monthly payments. So it can increase the money available for
expenses without adding to those expenses.
Reverse mortgages allow you to receive money in
several ways. The most popular is the equity line of credit. This way
you only borrow money as you need it. You can also receive a lump sum or
fixed monthly checks for the rest of your life, much like an annuity or
pension. You can even receive a combination of these options. The amount
you receive depends on your age, the value of your home and even the
area in which you live.
A reverse mortgage is still a loan, but it’s not
paid back until the last mortgage holder dies, your home is sold or it’s
left unoccupied for 1 year. If you and your spouse go into a nursing
home and don’t occupy the home for 1 year, then the loan becomes due and
your house must be sold. You (or your heirs) would receive any money
left over after the reverse mortgage is paid. If the house sold for less
than the loan amount, the lender would have to eat the loss.
Lenders won’t allow you to borrow the full value of
your home. Depending on the program and other variables, you may only be
able to access 60% of your home equity. It can be far less than that.
Fees can be very high and options can vary widely from one provider to
the next, so making accurate comparisons between providers can be very
difficult.
I believe that a reverse mortgage can work well for
seniors who have a limited income and wouldn’t otherwise be able to make
it without tapping into their home equity. A reverse mortgage can be a
low-risk way for seniors to remain in their home for the rest of their
lives. That’s why HUD created reverse mortgages in the first place, to
help cash-strapped seniors stay out of poverty without losing their
homes.
A reverse mortgage shouldn’t be used, though, until the money in
Certificates of Deposit and other investments is already gone. A reverse
mortgage should be the source of last resort.
That’s certainly not the message you get from
reverse mortgage providers. They show middle class seniors now free to
travel or buy that nice new car. Too often, seniors are being enticed
into these mortgages by the idea of it being ‘free’ money. It isn’t. If
you spend your home equity now on non-essential purchases, you won’t
have access to that money later should you really need it.
I think a reverse mortgage is wrong for those being
tempted to live beyond their means. Even worse is when financial
advisors encourage proceeds from a reverse mortgage be used for other
investments, such as equity indexed annuities.
Be very hesitant if you are approached by a
mortgage broker by phone, seminar or mail. Remember, using money from
your home isn’t ‘free’ money. Spending it is no different then spending
money in a CD or taking your principle out of a mutual fund.
Have a financial question? Send me an email and
I’ll personally respond, free of charge. Go to
www.guardingyourwealth.com and click on ‘Ask Jeff’.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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