How To Obtain a Reverse Mortgage
For an increasingly large number of senior homeowners, reverse mortgages are an attractive financing option that affords them the opportunity to remain in their own homes and receive much-needed funds.
A reverse mortgage is an exact replica of a traditional mortgage-in reverse. Instead of repaying a lender, homeowners utilize the equity they have built up in their homes to receive payments from the lender.
Eligibility
There are several criteria that must be met before a consumer is eligible for a reverse mortgage. Potential borrowers must be 62 years of age or older and live in their own home. Borrowers must also own their homes outright or have significant equity in their homes. Individuals with remaining balances on a first or second mortgage may be eligible for a reverse mortgage, but those mortgages will have to be paid off with the proceeds from the loan first. Single-family homes, manufactured homes, condominiums, and townhomes are all eligible properties.
There are no income, credit, or employment requirements to qualify for a reverse mortgage. The amount a borrower receives is dependent on age, interest rates, and the overall value of their home. Older borrowers will generally receive more than younger borrowers and home values are a major factor in determining the payout amount of the loan.
Borrowers are required to meet with a reverse mortgage counselor before obtaining a loan. Counselors are independent professionals who provide education about the mortgages and can suggest other alternatives. For a list of counseling agencies approved by the U.S. Department of Housing and Urban Development, visit www.hud.gov or call (800) 569-4287.
Payment Options
Once a borrower has obtained a reverse mortgage, there are several payment options available to them. A lump sum payment gives borrowers the total amount of the loan in a single payment. Fixed monthly payments allow loan recipients to receive payments for a set time period varying from several months to up to life. A line of credit lets borrowers utilize funds from the loan at any time.
According to the National Reverse Mortgage Lenders Association (NRMLA), “The most popular [payment] option-chosen by more than 60 percent of borrowers-is the line of credit.” The flexibility provided by a line of credit is the primary reason for its popularity.
Using the Funds
The proceeds from a reverse mortgage can generally be used in any way that the borrower desires. Borrowers frequently use the money to fund home repairs or modifications that will make aging in place easier and more comfortable. They may also opt to use the proceeds from the loan to cover rising health care or prescription drug costs. Obtaining money to pay off property tax bills and existing debts are also reasons that borrowers cite for seeking a reverse mortgage. Other consumers are looking for additional funds to enhance their lifestyles. This type of borrower may use the funds from a reverse mortgage to take vacations or purchase luxury items.
Paying Back the Loan
A reverse mortgage is due only when the last remaining borrower moves from the home, dies, or sells the home. Loans are repaid through the sale of the home. Therefore, the amount a borrower owes can never exceed the value of their home. (No assets, other than the house, can be attached by the bank in order to pay back the loan. This is called a non-recourse loan.)
Reverse mortgages have no affect on other assets and any debt associated with the loan cannot pass on to the borrower’s estate. Also, the NRMLA points out that if a home is sold and “the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to . . . [the] estate.”
Popularity of Reverse Mortgages
Reverse Mortgages have grown dramatically in popularity in recent years. The escalating cost of living, combined with the desire of seniors to remain in their own homes for as long as possible, has led to an unprecedented increase in the amount of loans...NRMLA credits this tremendous growth to increased understanding of the consumer protection features that are inherent in reverse mortgages. Such features included standard and capped interest rates, independent counseling, no prepayment penalty, and asset protection, among others.
In the past, reverse mortgages have been misunderstood and have faced many misconceptions. As more seniors receive accurate information, the loans continue to grow in popularity. Reverse mortgages are not the financial solution to every problem, and they are certainly not right for everyone. However, for seniors who wish to remain in their own homes for as long as possible, they are an important option that should be considered...
...Quick Facts about Reverse Mortgages:
Types:
Home Equity Conversion Mortgage (HECM) – This federally-insured private loan program is administered by the Department of Housing and Urban Development (HUD). Like all reverse mortgages, this loan requires that the borrower be 62 years of age or older and own their home or have significant equity in their home. Loan applicants must currently live in the home. Additionally, individuals must complete free mortgage counseling from HUD-approved counseling sources.
Single-purpose reverse mortgages-Provide borrowers with smaller loan amounts to pay for express costs. These mortgages are generally offered by state or local government agencies for a specific reason. Often these loans are used to pay for repairs or home modifications, allowing seniors to remain in their homes. They also may be offered to help pay property taxes. They are not available in all areas; check with your local Office on Aging about loan availability.
Proprietary reverse mortgages- (usually called "jumbo reverse mortgages) Generally the type of loan individuals are referring to when they mention reverse mortgages. These reverse mortgages are not federally insured and are offered by banks, mortgage companies, and other private lenders. Mortgages are backed by the companies that develop them. Although proprietary reverse mortgages are generally more expensive than the other types, there are no restrictions on how the money can be used. Loan advances are generally available to quickly provide borrowers with much needed funds.
General Features of all Reverse Mortgages:
Social Security and Medicare benefits are generally not affected by reverse mortgages. Seniors should consult with a benefits advisor in order to ensure that there will be no change in their benefit status (if they are receiving social security on a special program or are on Medicaid).
Homeowners retain the title to their homes until they die, permanently move from the home, sell the home, or reach the end of their loan period. This is beneficial for seniors because a move is considered permanent only after 12 consecutive months out of the home. Seniors could therefore live in an assisted living or nursing facility for recovery or rehabilitation and return to their homes without affecting their loan.
Reverse mortgages are rising-debt loans. The interest is added to the principal loan balance each month. Therefore, the amount that the loan recipient owes increases significantly with time. At the end of a reverse mortgage term or when the homeowner dies or moves, there will be little or no equity left in the home. There are fewer assets for the homeowner and his or her heirs.
Lenders can determine which fees will be charged and the rates for those fees. Fees include origination fees, closing costs, and servicing fees.
Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. Homeowners are still responsible for taxes, insurance, utilities, maintenance, and other housing expenses.
Information adapted from the Federal Trade Commission’s consumer article, “Reverse Mortgages: Proceed with Care.” For more information, please visit their website at http://www.ftc.gov/bcp/conline/pubs/homes/rms.htm.
Showing posts with label financial safety. Show all posts
Showing posts with label financial safety. Show all posts
9/17/2008
Fixed Annuities: Preying Salespeople?
To all:
I admit it! I'm a "senior" and glad of it. But, when I was 16 I knew there was no way I'd EVER be 30! How times change. Yet, today, I still feel I'm the same "me", I've always been.
But, if you're like me (not the 30 years old bit), a senior, you're probably being invited out to eat 7 or 8 times a week, at the best of restaurants! Almost daily my mail holds at least one invitation or more to a free gourmet meal - if I'll just be grateful for the opportunity to find out about the greatest, safest retirement vehicle, EVER!
I've gone to a few (Who can resist the photo of a Morton's juicy filet, done just right, filet?). But, with a few exceptions, it's really a good meal and a hard sell. So, when I saw the story below by Money Magazine's "Mole", I wanted to share it with you.
Enjoy your day,
Gloria
Money Magazine: Ask the Mole
Financial advisers preying on senior citizens
If you've attended a seminar with financial
advisers pitching annuities, proceed with caution.
NEW YORK (Money)
Question:
I was at a presentation to senior citizens who have most of their funds invested in fixed income products (CD's). The presenter showed how our investments are taxed and we don't keep up with inflation. He scared the hell out of us. Then came the product he sells which was a fixed annuity that guarantees you get all the gains from the stock market and none of the losses. Is this real?
The Mole's Answer:
This type of product - and the tactics used to sell it - are the proverbial pebble in my shoe. Steer clear of this annuity salesman, as he is preying on your emotions and selling some righteously nasty stuff.
Let me first address his sales technique and then I'll tell you what he's selling.
Any financial sales person knows that the two most powerful motivators are fear and greed.
Fear. "Do you want your money to be there when you need it?" "Do you want money for groceries?" Lines like these are especially powerful to seniors, because the prospect of running out of money is a scary thing.
This fear of coming up short is reinforced in the sales presentation when the adviser shows a low paying CD or savings account being taxed at a rate that is probably the highest, to demonstrate how it's not keeping up with inflation.
Then the financial salesperson will usually segue into the stock market and all its risks. She (he)may bring up terrorism, recession, war, etc. to convince you that you don't want to take this risk.
So now the salesperson has left you with two bad options - have your money eaten up by taxes and inflation, or risk it all by putting it in the stock market.
Greed. Now the presentation becomes an adult version of ghost stories around the campfire.
And once the audience is scared to death, convinced their very futures are hanging by a thread, the presenter offers up the perfect solution. You can bet the "perfect solution" will always be some version of a guarantee that panders to our sense of greed.
The fixed annuity in this presentation is called an equity-indexed annuity. The presenter likely told you that you'd have the upside of the market without any downside risk whatsoever. The pitch may go something like the illustration.
Dilemma solved, crisis averted, now everybody get out your checkbooks.
Sound too good to be true?
It is.
Here's why the equity-indexed annuity doesn't work.
There are thousands of different versions of these annuities, though there is a commonality with each and every one. And that common thread is that they're complicated: It would be easier to map the human genome than figure out how the earnings on these annuities are calculated.
In the oral presentation or meeting, the salesperson will tell you that you get all of the upside of the market, but read the fine print and you'll find something quite different - if you can understand it. They always seem to have what are called caps, spreads, surrender schedules - things that will cut into your returns - and then conveniently leave out the portion of the market return that comes from dividends.
In the end, you're really only getting a fraction of the gains of the overall market.
In addition to the list of complicated fees and penalties, the insurance company selling this product will put the majority of your funds in bond-like investments that generate low returns to begin with. It then takes those earnings and pays handsome commissions to the financial planner (a.k.a salesperson), covers its overheads and collects a profit for itself. Anything left over will go to the annuity holder (that's you).
So the salesperson created the perfect illusion by first "scaring the hell" out of you and exploiting your fear, then exploiting your greed with the prospect of profiting off market gains and
eliminating the risk.
But an illusion is exactly what it is. In fact, when I sit down with a client that has previously bought one of these annuities, I usually have to explain that they ended up with only about a quarter of the actual return of the market, and that they would have been far better off in a decent CD.
My Advice: First, always be on the lookout for anyone pitching a financial product using scare tactics. Never buy any financial product on the spot. Go home and sleep on it. Discuss it with friends.
Steer clear of those can't-lose funds. It's natural to want market returns without risk but it doesn't exist. If the insurance company knew how to earn those returns without risk, they would have billion-dollar investors and wouldn't need to bother with small fish like us.
Manage any anxiety you might have about financial security by keeping your safe money safe. Don't settle for an average-paying CD, however. Shop for the highest rates on sites like Bankrate.com or Bank Deals. Always make sure your money is insured by either the FDIC (banks) or NCUA (credit unions).
Keep in mind that some financial planners exist just to separate you from your money, and they are quite skilled at manipulating your emotions. I recommend funding your retirement, rather than theirs.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com.
.
.
.
.
.
.
.
I admit it! I'm a "senior" and glad of it. But, when I was 16 I knew there was no way I'd EVER be 30! How times change. Yet, today, I still feel I'm the same "me", I've always been.
But, if you're like me (not the 30 years old bit), a senior, you're probably being invited out to eat 7 or 8 times a week, at the best of restaurants! Almost daily my mail holds at least one invitation or more to a free gourmet meal - if I'll just be grateful for the opportunity to find out about the greatest, safest retirement vehicle, EVER!
I've gone to a few (Who can resist the photo of a Morton's juicy filet, done just right, filet?). But, with a few exceptions, it's really a good meal and a hard sell. So, when I saw the story below by Money Magazine's "Mole", I wanted to share it with you.
Enjoy your day,
Gloria
Money Magazine: Ask the Mole
Financial advisers preying on senior citizens
If you've attended a seminar with financial
advisers pitching annuities, proceed with caution.
NEW YORK (Money)
Question:
I was at a presentation to senior citizens who have most of their funds invested in fixed income products (CD's). The presenter showed how our investments are taxed and we don't keep up with inflation. He scared the hell out of us. Then came the product he sells which was a fixed annuity that guarantees you get all the gains from the stock market and none of the losses. Is this real?
The Mole's Answer:
This type of product - and the tactics used to sell it - are the proverbial pebble in my shoe. Steer clear of this annuity salesman, as he is preying on your emotions and selling some righteously nasty stuff.
Let me first address his sales technique and then I'll tell you what he's selling.
Any financial sales person knows that the two most powerful motivators are fear and greed.
Fear. "Do you want your money to be there when you need it?" "Do you want money for groceries?" Lines like these are especially powerful to seniors, because the prospect of running out of money is a scary thing.
This fear of coming up short is reinforced in the sales presentation when the adviser shows a low paying CD or savings account being taxed at a rate that is probably the highest, to demonstrate how it's not keeping up with inflation.
Then the financial salesperson will usually segue into the stock market and all its risks. She (he)may bring up terrorism, recession, war, etc. to convince you that you don't want to take this risk.
So now the salesperson has left you with two bad options - have your money eaten up by taxes and inflation, or risk it all by putting it in the stock market.
Greed. Now the presentation becomes an adult version of ghost stories around the campfire.
And once the audience is scared to death, convinced their very futures are hanging by a thread, the presenter offers up the perfect solution. You can bet the "perfect solution" will always be some version of a guarantee that panders to our sense of greed.
The fixed annuity in this presentation is called an equity-indexed annuity. The presenter likely told you that you'd have the upside of the market without any downside risk whatsoever. The pitch may go something like the illustration.
Dilemma solved, crisis averted, now everybody get out your checkbooks.
Sound too good to be true?
It is.
Here's why the equity-indexed annuity doesn't work.
There are thousands of different versions of these annuities, though there is a commonality with each and every one. And that common thread is that they're complicated: It would be easier to map the human genome than figure out how the earnings on these annuities are calculated.
In the oral presentation or meeting, the salesperson will tell you that you get all of the upside of the market, but read the fine print and you'll find something quite different - if you can understand it. They always seem to have what are called caps, spreads, surrender schedules - things that will cut into your returns - and then conveniently leave out the portion of the market return that comes from dividends.
In the end, you're really only getting a fraction of the gains of the overall market.
In addition to the list of complicated fees and penalties, the insurance company selling this product will put the majority of your funds in bond-like investments that generate low returns to begin with. It then takes those earnings and pays handsome commissions to the financial planner (a.k.a salesperson), covers its overheads and collects a profit for itself. Anything left over will go to the annuity holder (that's you).
So the salesperson created the perfect illusion by first "scaring the hell" out of you and exploiting your fear, then exploiting your greed with the prospect of profiting off market gains and
eliminating the risk.
But an illusion is exactly what it is. In fact, when I sit down with a client that has previously bought one of these annuities, I usually have to explain that they ended up with only about a quarter of the actual return of the market, and that they would have been far better off in a decent CD.
My Advice: First, always be on the lookout for anyone pitching a financial product using scare tactics. Never buy any financial product on the spot. Go home and sleep on it. Discuss it with friends.
Steer clear of those can't-lose funds. It's natural to want market returns without risk but it doesn't exist. If the insurance company knew how to earn those returns without risk, they would have billion-dollar investors and wouldn't need to bother with small fish like us.
Manage any anxiety you might have about financial security by keeping your safe money safe. Don't settle for an average-paying CD, however. Shop for the highest rates on sites like Bankrate.com or Bank Deals. Always make sure your money is insured by either the FDIC (banks) or NCUA (credit unions).
Keep in mind that some financial planners exist just to separate you from your money, and they are quite skilled at manipulating your emotions. I recommend funding your retirement, rather than theirs.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com.
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