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Monday, December 01 2014

You’re at home watching TV and trying to unwind, when all of a sudden here comes another baby boomer celebrity, looking into the camera, giving you his most sincere, trustworthy look, then assuring you that a “Reverse Mortgage” really isn’t too good to be true (even though it sounds like it is).

What could be better? Any homeowner 62 or older can apply: then the bank pays you instead of the other way around! You could even use part of the tax-free proceeds to pay off the other mortgage! Or go to Monte Carlo and break the bank! (The trustworthy celebrity only hints at that one). You don’t have to pay back the loan until blah blah blah, the property remains yours, etc. etc. etc. What could go wrong?

Short answer: quite a lot, actually.

Long answer: if you don’t plan for the long term consequences, this can be a potentially disastrous maneuver. As a quick and painless way to raise cash, it often is too good to be true.

For openers, the actual name of this loan is not ‘reverse mortgage’— it’s an HECM, Home Equity Conversion Mortgage—a much more descriptive name. It allows 62+-year-olds to ‘cash out’ the equity they’ve built in their home. Not all of the equity; just some.  As soon as they no longer live in the home, the loan must be repaid in full. The problems are all in the details.

Detail 1: Payback

Suppose a husband and wife live in a house owned by the husband. He applies for reverse mortgage, dies 11 years later, leaving the house to his wife. Because the reverse mortgage becomes payable when the mortgagee (the husband) “leaves” the property, the loan becomes due and payable. So the spouse may be forced to sell the home in order to repay the loan. But it’s also possible that the same thing occurs when the mortgagee is permanently relocated to a nursing home.  

Detail 2 (and it’s one you really have to take into account): Interest

Most often, no payments are made on reverse mortgages. Unless the trip to Monte Carlo ended well, it’s likely that the balance owed remains. However, interest accrues on the loan at the “prevailing rate”—which may be a misnomer, because reverse mortgage interest rates are often high. Over the long run, the amount owed could eat up most of the value of the house. The spouse could be left with very little to live on.

While the fees charged for a reverse mortgage are capped by the government, they’re still much higher than those for traditional loans (possibly why the trustworthy boomer celebrity got involved in the first place). Because credit scores aren’t used to determine eligibility, higher fees are charged to help cover lender risk. Then there are requirements for keeping up the property (what if illness causes a temporary lack of attention?), paying taxes on time…and other circumstances that could cause the loan to be called in, forcing sale of the home.

Yes, a reverse mortgage can be a valuable resource for some retirees on limited incomes. However, before even thinking about committing, it’s vital to sit down with a trusted financial adviser. If it turns out that selling or downsizing makes a lot more sense, calling me is the next step!  You can reach me on my cell phone: 812-499-9234 or email: Rolando@RolandoTrentini.com

Posted by: Rolando Trentini AT 10:23 am   |  Permalink   |  0 Comments  |  Email
Thursday, June 21 2012

Until recently, reverse mortgages were considered the “Wild West” of retirement planning, writes a Wall Street Journal article published this week. But today, many more planners are using them to create a stream of income or a cushion against market declines.

WSJ speaks with two financial planners including Harold Evensky, co-author of a study at Texas Tech that has brought reverse mortgages into recent headlines. The article writes:

“Using your nest to help with your nest egg is becoming a more common way to round out a financial plan during retirement.

Even after the bursting of the housing bubble, the biggest financial asset many retirees have is their home. But because that money is tied up in the equity of the house, it’s an investment that has been difficult to count on as a source of income.

Reverse mortgages have long been an option. However, until recently, they were the Wild West of retirement planning. High upfront costs, poor disclosure and dodgy sales pitches made them an option that many advisers avoided.

Now, with the introduction of reverse mortgages backed by the Federal Housing Administration in late 2010, more financial planners are adding them to their tool kit.

Primarily, they’re using them as a way to provide a steady stream of tax-free income that can last the rest of a retiree’s life. They can also be used as a way to provide a cushion against a big, but temporary, drop in the markets….”

 

Read the full article at WSJ.com.

Posted by: Rolando Trentini AT 08:00 am   |  Permalink   |  0 Comments  |  Email
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The Trentini Team
F.C. Tucker EMGE REALTORS®
7820 Eagle Crest Bvd., Suite 200
Evansville, IN 47715
Office: (812) 479-0801
Cell: (812) 499-9234
Email: Rolando@RolandoTrentini.com


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