Using Reverse Mortgages to Augment Lost Savings

Seniors using reverse mortgages to repair diminished nest eggs
Thursday, 25 June 2009 10:43
BY GERALD J. ROBINSON
NEWJERSEYNEWSROOM.COM

Seniors' portfolios hammered by the stock market decline are getting a boost from reverse mortgages. Such mortgages allow seniors to get monthly payments based on the equity value in their homes – the amount that the value of the home exceeds any mortgage on the home.

It's reported that in recent months the number of reverse mortgages backed by the government jumped nearly 20 percent from the same period last year. And it's not just the stock market decline that's at work: a tough housing market has made it more difficult for seniors to sell their homes and downsize.

Especially for older individuals who intend to remain in their homes for the rest of their lives, the reverse mortgage may be the ideal way to deal with a cash shortfall. It's especially attractive because it can provide monthly payments to the homeowner for life and does not have to be paid off until the owner's death or when the home is sold.

The amount of cash flow that a homeowner can get out of a reverse mortgage mainly depends on four factors:
1. The homeowner's age
2. The amount of equity in the homeowner's home available to support the loan
3. The interest rate on the reverse mortgage
4. And closing costs.

Aging has its compensations, at least in figuring a reverse mortgage payout. The older the homeowner, the better, because the payout increases with the homeowner's age on the date the mortgage begins...

...If there's no mortgage on the home the cash flow from a reverse mortgage will be higher than if there's a mortgage. This is because the equity in the home is 100 percent of its market value. But even if there is a mortgage on the home a reverse mortgage can be attractive, depending on the amount of the mortgage and the value of the home.

A rough idea of the amount of monthly payments that can be obtained from a reverse mortgage can be gleaned from online calculators. Take, for example, the calculator at the AARP website. It shows that a 71-year old Sarasota, Florida homeowner can get a monthly cash flow of $851 if his mortgage-free home is worth $250,000.

Reverse mortgages are not simple. A good source for learning more about them isFannie Mae's Money from Home: A Consumer's Guide to Reverse Mortgage Options. It can be found at fanniemae.com. Fannie Mae's consumer's guide is required reading for anyone seriously thinking about a reverse mortgage.

Gerald J. Robinson, Esq., a former tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition. © Gerald J. Robinson

Buy Your Retirement Home with a Reverse Mortgage

To all: Financial news has been dark, and perhaps for seniors the darkest of all as retirement income is cut and others desiring to retire must continue to work. But there is, at least, one bright spot: reverse mortgages can now be used to purchase a home.

Imagine being able to sell your home, use some of or all of the equity you get as the down payment on the retirement home you have yearned for, and pay for the balance of this home with a mortgage that will not require any mortgage payments, and also has no credit, income or asset qualifications! This , of course, is a bit of a simplification, but is nontheless true.

A reverse mortgage, that has NO monthly mortgage payments can now be used to purchase property. Please refer to other articles in this blog (Buy A House With No Mortgage Payment) that will explain how a reverse mortgage can be used to purchase a home, and/or write or call me for specific details for your situation.

Have a great day!
Gloria
gloria.boone@gmail.com
703-244-8151



Home sweet retirement home...(especially when purchased with a Reverse Mortgage. gb)

By Dan Kadlec, Money Magazine contributing writer
February 11, 2009: 6:08 AM ET



With prices down by a third in many markets, it may be time to start shopping for the house you want to end up in.

Discount Territory for Retirement
Since 2006, home values in many retirement areas have fallen 30% or more vs23% average drop in house prices nationwide.


City Average Home Price Drop since peak
Naples, Fla. $350,843 -38%
Las Vegas $215,542 -36%
Phoenix $203,151 -32%
Source:SOURCES: S&P Case-Shiller; Zillow.com.


My wife and I recently swallowed hard and bought a tiny cabin on a prime lake-front lot near the Berkshire hills in western Massachusetts where we'd like to retire one day. (At a later date, we'll build a bigger house.) Were we early, buying before housing prices hit rock bottom? Almost certainly. Are we losing sleep over it? Absolutely not.

We love knowing we've locked up a fantastic piece of property at 20% below the asking price - the price it might have fetched a few years ago. Now we're enjoying planning for our retirement in specifics - and meanwhile, spending as much time in our Berkshires retreat as we are able to.




If you also dream of retiring to an idyllic waterfront locale, a country plot or an active-adult community, you may similarly find that now is the right time to buy - or at least to start looking in earnest. Prices in once frothy retirement havens like Las Vegas, Naples, Fla. and Phoenix have tumbled more than 30% since peaking in 2006.

Sure, values may go lower still, given forecasts that the housing market will stay soft through 2009. Picking the exact bottom is a dicey game, however. And in any case, the question that matters most to retirement buyers is not what price the house you want will sell for next year but whether it will be worth more than what you paid for it in, say, 10 or 15 years.

Framed that way, the values in retirement homes right now are compelling in many areas. The following steps can help you decide if you're ready to make this leap and, if so, how to land the best deal.

Know what you can afford

Before you spend time and energy scouting properties, make sure you can clear the hurdles that buying now may present. Financing remains tight, so you'll need stellar credit (740 or higher) to qualify for the lowest mortgage rate. Then too, spending money on a second home isn't wise if your job could be in jeopardy because of the recession. And if your nest egg has been seriously dented by falling stocks, you'd be better off putting extra cash into rebuilding it, not carrying the costs of two properties. If these aren't obstacles for you, let the shopping begin.

Pick your sweet spot

The current downturn has hit virtually every corner of the market. So you can find deals almost anywhere; the trick is to home in on locales where the houses also have a good shot at maintaining their value going forward and eventually appreciating.


Your best bet: areas with large employers in growth industries such as health care and technology or that offer other extras that will help fuel expansion. Examples include the new airport planned for Panama City Beach, Fla. and the Goldilocks weather (not too hot, not too cold) in the Carolinas, which have seen a recent influx of new residents from the Deep South, typically former northerners who are coming partway back up the coast to recapture a taste of the four seasons.




If you prefer an active-adult community, you'll find the best values in complexes completed more than five years ago. "You won't get the very latest and greatest amenities," warns Rebecca Stahr, a consultant to adult-community builders at LifeSpring Environs in Atlanta. But that's why prices of these homes have fallen more than those of newer ones - other buyers are likely to favor newer developments that offer lots of on-site facilities like restaurants and spas.


Warning: Stay away from projects that aren't finished, no matter how many free upgrades the developer offers. Builders' struggles mean that construction sites may stay in the construction phase for quite a while.

Drive a hard bargain

Offering 10% less than recent sales is a good starting point; a 20% haircut is okay if you're worried about further drops in the market. If you get a cold response, you can always raise the offer and possibly still walk away with a good deal.

Work with an ally


Normally, real estate agents are legally bound to work on behalf of the seller to land the highest price. But you can choose instead to work with an agent accredited to represent the buyer; in this case, the legal obligation is reversed and the broker is compelled to use her understanding of the seller and the property to extract the lowest price on your behalf. (Find a buyer-agent through referrals or at rebac.net.)


True, the agent still draws her fee from the sales commission so her loyalties, unofficially, may be divided. But given the turbulence of the market, you gain an advantage by working with a knowledgeable partner. Says Carroll: "At times like these it pays to have an advocate."


Dan Kadlec is co-author of The Power Years, a guide for boomers. E-mail him at boom_years@moneymail.com.

Reverse Mortgage Discussion with an FHA Executive


The latest on reverse mortgages
If you're 62 or older and the stock market is eating your retirement, there are still options open to you. Host Scott Jagow, host of the Marketplace Morning Reprot asks Meg Burns of the FHA about reverse mortgages.

TEXT OF INTERVIEW
Scott Jagow: If you're 62 or older and the stock market is eating your retirement, here's something to think about: a reverse mortgage.

Instead of making a payment every month, you get paid. It's a loan, it's tax free, and it's due when the house is sold.

The government just made some changes to reverse mortgages, so let's bring in Meg Burns. She's with the Federal Housing Administration. (An executive lead in the Federal Housing Administration's Single Family Homes Division)

Meg, first, why a reverse mortgage instead of say, an equity line of credit?

Meg Burns: To qualify for a home equity line of credit, a senior has to have some source of income that demonstrates their capacity to repay on that mortgage and a lot of seniors don't actually have cash flow, they don't have a lot of assets to tap, and that's the beauty of the reverse mortgage: you don't actually have to have income to qualify for it.

Jagow: What do you have be careful with if you're thinking about doing a reverse mortgage?

Burns: Well, there are two factors at play here. One is the senior gets hurt in the sense that they tapped into equity for something that maybe then they were disappointed they spent the money on and there's not additional equity to tap for something else.

When the senior dies, the estate is responsible for selling the property and then those proceeds are used to pay off the reverse mortgage, so it is true that potentially the heirs are affected by an unwise use of reverse mortgage proceeds as well.

Jagow: Now I read that the fees for reverse mortgages can be kind of high and that you have to watch out for that.

Burns: This is actually one of those interesting myths. The fees associated with the reverse mortgage are exactly the same as the fees and charges associated with the forward mortgage. The difference between the reverse and forward is that all of the charges are very transparent with the reverse mortgage.

As we all know, when you get a forward mortgage you often have the option to a "no closing cost" loan or no origination fee but the lender folds that into the interest rate, so there are fees and charges that people don't see that are very obvious to them with reverse mortgages which is actually a good thing.

Jagow: Yeah. Interesting. Well, I'm glad you brought that up. There have been some changes to the policy regarding reverse mortgages. Some of them have to do with consumer protection. I want to focus on the limit for these mortgages. It's been up to $417,000. How does that affect the landscape for reverse mortgages?

Burns: It's actually a very good thing for the FHA reverse mortgage product. FHA's loan limits previously varied by geographic area and they were set based on the median sales price in the area. So, in low cost areas like Alabama, the limits were set in the $200,000 range. In higher cost areas like say, parts of California, they were set at the $360,000 range.

So, the new single national loan limit makes the product more equitable for seniors living all across the country that based on the value of their property as apposed to the FHA loan limit, they would be eligible to tap the same amount of proceeds.

Jagow: Well, you've been very helpful Meg. Meg Burns from the FHA. Thanks for joining us.
Burns: Thank you for having me.

Dollars and Sense of Retirement:
Living Below Your Means
provided by: NOLO
How to live below your means in order to have a substantial retirement

Whether you are planning to retire or have already made the leap, you may long for some material luxury such as a new car or a second home and you may even have enough cash on hand to pay for it. But because you must build a safe spending and budgeting plan for the long term, you need to keep that money invested and working for you, instead.

This is the sort of discipline it takes to Live Below Your Means, which will become your guidepost for all spending-related matters in your retirement years.

What It Means to Live Below Your Means

Living Below Your Means is spending less than you make, less than you could, less than your peers. It is a powerful tool -- combining discipline, commitment, and a healthy orneriness to stand against the tide of material consumption. It shouldn't mean deprivation, or being pennywise and pound foolish. Think of it simply as a sensible way of ensuring that money doesn't get squandered through carelessness, impulsiveness, or in keeping up appearances. Buy what you need and have some fun, but don't expect to buy everything you want.

You probably have some ready role models for this way of living and spending. Think of your parents' or grandparents' approach to spending; people who grew up during the Great Depression were often thrifty in the extreme and remained that way all their lives. You didn't see them buying a new car every three years. They recycled before it was fashionable and used things until they wore out. While you may never need to be or want to be quite as frugal as your ancestors -- rewashing plastic bags and aluminum foil, anyone? -- the heart of their time-tested spending disciplines can still serve you well.

But others don't have it so easy. They see their lives as full of spending temptations -- including meals in high-end restaurants, expensive hobbies, fast new cars, fine art, and luxurious hotels. Sometimes, just getting the property taxes paid, the insurance covered, and the kids to camp can blow the budget.

If you are just starting to plan for early retirement, with a modest amount of savings and a seemingly endless list of demands on your paycheck, you will need to buckle down. The bottom line during your planning years -- while you are working full-time to get to early retirement -- is that your savings must grow every year, with plenty of fresh cash flowing in. That will probably mean developing a new family culture of frugality, of doing more with less, cutting back on some of the little luxuries, and postponing or passing up bigger ticket items.

That admonition aside, the reality is that how much you spend and what defines "frugal" for you and your family involve very personal decisions, defying a single recommended script. What is working for a young San Francisco couple who escaped the city for a simpler life as early semi-retirees in the Sierra Nevada mountains will simply not fit a frustrated senior executive who is seeking to continue an objectively lavish lifestyle while starting a little hedge fund and working part-time from home.

The approach you choose must fit your preferences, budget, and lifestyle.

Creating Your Spending Plan

Whether you have retired early or are still in the planning years, there are some proven steps for building and keeping a spending plan -- some people just cringe at the word budget -- that will help you Live Below Your Means.

Make It Reasonable

There is no point in setting spending and saving goals you simply cannot meet, or that put you and your family through such pecuniary anguish that they threaten the fabric of your world. Set budget targets that stretch but don't break you. Your goal is to feel good about the progress you are making, not to feel bad about how far you might have fallen short or still have left to go.

Make It Easy to Track

There are plenty of ways to keep track of your spending -- and compare how you are faring against your plan.

Some people are avid fans of the complete control method, tracking every single transaction in software such as Quicken or Microsoft Money. Others prefer a more flexible approach that doesn't require constant recordkeeping. And still others prefer something in between.

They have at least some categories for tracking spending, especially separating out items that are only paid once or twice a year from the regular monthly budget, such as insurance and taxes.
Within the monthly budget, they break out core necessities from more discretionary spending. It is then easier to target the things that will be cut first if spending starts to swing out of whack.

Make It a Group Effort Nothing keeps marriage counselors employed like money troubles. If you are in a relationship, work out spending and saving goals together with your spouse or partner -- and develop mutually respectful ways to implement them so you can stay on track together.

Give each other some slack and celebrate the progress you make. Work out solutions together when changes are needed. Above all, try not to let the roles become polarized: tightwad v. spendthrift or virtuous nagger v. irresponsible child.

HELP! My 401K Is Melting (Retirement)

Help! My 401(k) Is Melting
By John Rosevear
September 23, 2008

It has been a rough few weeks in the market, and nothing creates a bull market in investment advice like market turbulence. It seems like every morning brings, along with a fresh round of gut-wrenching news about bailouts and bank disasters and commodity price jolts, a fresh round of "what to do with your 401(k)" stories from the major media.

The thing is, many of the "advisors" driving these stories bring their own biases and predilections to the table, and that means there's a lot of odd and conflicting advice out there. In the past few days, I've taken in a whole bunch of these advice stories, in both local and national media. I've heard some great ideas and some crazy ones, and I've tried to sort through the pile to get to some simple rules of thumb.

Here's my take on the best approach to this mess for those who are at least seven to 10 years from retirement. (I'll follow up with thoughts for those approaching or in retirement in a separate article.)

Things to do
Do remember that bear markets, even scary churning bear markets where everyone's fear levels seem fixed at near-panic levels, are a normal feature of our markets. They've happened before, they'll happen again, and this too shall pass -- in all likelihood, long before it's time for you and me to retire. There's no reason for us to panic, even if the pros are.

Do remember that the most apocalyptic predictions you see in the media are unlikely to come to pass. Apocalyptic predictions seem to be a feature of bear market periods -- some experts believe that a spike in doomsaying is a sign that the bottom is nigh, and yes, some people try to track this sort of thing. You and I are best served by shrugging it off.

(If all else fails and you can't escape the feeling that the Second Great Depression is upon us, do remember that even during the original much-ballyhooed Depression, most of the economy recovered after seven years or so. No economic condition is permanent.)

Do be somewhat conservative with new investments -- but do keep investing. I've been saying that this is a great time to pick up dividend-paying blue chips, the kinds of stocks you can hold for decades. I'll totally understand if you want to avoid JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), or Bank of New York Mellon (NYSE: BK) for a while. But I think stocks like Pfizer (NYSE: PFE) and Automatic Data Processing (NYSE: ADP) -- which are both somewhat recession-resistant, pay good dividends, and are likely to be around for the long haul -- are worth a look at these prices, as are beaten-up stalwarts like Starbucks (Nasdaq: SBUX) and American Express (NYSE: AXP), both of which I bought recently.

Do keep contributing to your 401(k), do keep dollar-cost averaging into long-term investments like index funds, and do keep the long term in mind.
The list of don'ts What fun is a list of Dos without a list of Don'ts?

Don't completely bail out of stocks. Dial down your risk level if you must, but remember that market turnarounds tend to be sudden and sharp -- you don't want to be chasing that train when it comes.

At the same time, don't be too aggressive with smaller growth stocks unless the argument for them is really, really compelling -- and takes economic uncertainty into account. Forward earnings projections, never worth putting much faith in, are particularly worthless in the face of an extended period of economic turmoil.

Don't try to rebalance your portfolio right now. I heard an investment advisor on a local radio station suggest rebalancing at the height of the volatility last week. That seems like a bad idea to me. Rebalancing involves selling investments that have gone up and buying more of those that have gone down. In a highly volatile market, that seems likely to be frustrating at best -- and possibly a very bad idea.

Don't hold your employer's stock. This isn't a good idea any time, but it's a particularly bad one now. If your company hits the skids and you get laid off, that's bad, but at least your 401(k) will be OK -- unless it's built around the same company. Diversify your risks, both in your portfolio and with the rest of your finances.

And most importantly ... Don't panic.

Panic leads folks to make all kinds of bad decisions. Now is an excellent time to skip the business section of the paper, turn off CNBC, and go for a walk or something instead. The market's story will unfold whether we're paying attention to it or not.