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Guarding Your Wealth for Seniors
Seniors Not Getting The Whole Story on Mortgages
By Jeffrey D. Voudrie, CFP
President,
Legacy Planning Group
Sept. 26, 2005 -- Financial salespeople such as
investment advisors and mortgage brokers are recommending ‘new’ types of
mortgages to senior citizens and baby boomers for improving cash-flow,
freeing up money to invest, and having money to take that dream
vacation. Their sales pitches sound so enticing. But here’s what they
don’t tell you.
In the past, the only decision to make when getting
a mortgage was whether you wanted a fixed or adjustable rate. Now,
seniors are being pitched interest-only mortgages, option-ARMs and
reverse mortgages. It’s easy to become confused and overwhelmed. The
result is you can spend thousands of dollars in fees and end up with a
mortgage that doesn’t meet your needs.
In a traditional mortgage, part of each monthly
payment covers interest while the rest goes to pay down the principle
amount you borrowed. With each payment you are decreasing the amount you
owe and increasing your equity.
Interest-only, option-ARMs and reverse mortgages
function quite differently from the traditional mortgage. Instead of
decreasing the amount you owe, you will most likely be maintaining the
same level of debt. In some cases you will actually be increasing the
amount you owe—you will be going further into debt with each payment you
make!
With an interest-only mortgage, you pay the amount
of interest due each month for the first 10 years. This is still a
30-year mortgage, but you don’t begin paying down principle until year
11. Since there isn’t any money going to principle, your monthly
payments will be less than with a traditional mortgage only during those
first 10 years.
This can make sense in certain
situations—especially for cash-strapped seniors. Since the monthly
payment is lower, it will reduce what you take out of your retirement
account. That means you won’t have to pay income tax on that retirement
money. It can continue to grow tax-deferred.
I only recommend this strategy as long as there
remains at least 25% home-equity. Also, it’s not a good idea to tap into
equity during the refinancing to buy a new car or take a fancy vacation.
This isn’t free money. Spending the equity in your home is no different
than spending the money you’ve invested in a CD or mutual fund.
The option-ARM is being heavily promoted these
days—but watch out! They’re sold based on their low introductory
interest rate (as low as 1%) and a special low payment. And they give
you the ‘option’ of the kind of payment you make each month. You can
make the special low payment, you can pay the interest-only, or you can
pay principle and interest just like a traditional mortgage.
On the surface this sounds good, allowing seniors
to increase cash flow or to free-up their home equity so they can invest
it in other, ‘better’ investments such as equity-indexed annuities.
But don’t do it. People buying this mortgage think
they are getting a great deal because of the low interest rate and the
low payment. What they don’t realize (and what isn’t properly explained
to them) is that each time they make that special low payment they are
going further into debt.
Think about it. Let’s say you borrow $200,000 and
the interest-only payment is $1000 per month. If you instead make a
payment of $400 then the $600 in interest you didn’t pay is added to
what you owe. So next month the interest due is based on owing $200,600.
Do this for a year and you have dramatically increased what you owe.
Instead of saving money like you thought, you were actually spending the
equity in your home on other things.
The low introductory rate only lasts a short time,
often just a few months. After that, you can end up paying a higher
interest rate than if you went with a traditional mortgage in the first
place. The costs of getting an option-ARM are higher as well. These only
make sense in a few isolated situations. Most people should stay away
from them.
Next week I’ll talk about the advantages and
disadvantages of reverse mortgages. I will also share stories from my
readers that illustrate the shady mortgage-related sales pitches that
are now being used. Don’t buy one of these mortgages until then.
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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