Reverse mortgages as a way forward
October 26, 2008
By Sarah Shemkus
The Falmouth Senior Center holds educational seminars on reverse mortgages four or five times each year.
Recently, however, the events have started attracting a lot more interest, the facility's director, John Magnani, said.
"The last time someone came to present on reverse mortgages we probably had double the crowd we normally have," Magnani said.
With prices rising, the stock market falling and economic uncertainty spreading, a growing number of Cape Cod's senior citizens are looking to reverse mortgages as a potential source of stable supplemental income.
When 401(k)s are going down in value, this is a particularly important tool to supplement income that you may be losing," said Darryl Hicks, the vice president of communication for the National Reverse Mortgage Lenders Association.
At the Housing Assistance Corp. in Hyannis, the number of households seeking reverse mortgage counseling — required by state law for those receiving such a loan — more than tripled from the second quarter of the year to the third quarter, jumping from 16 to 52.
"That's definitely been determined by the economic situation," said Nancy Davison, the agency's vice president of operations.
As financial pressures drive increased interest, however, homeowners considering a reverse mortgage should make sure they know exactly what they're getting — and who they are getting from, experts cautioned this week.
"They are not something to be entered into lightly," warned Thomas Kosman, a staff attorney in the Hyannis office of South Coastal Counties Legal Services. A reverse mortgage is, most simply, a type of loan that lets homeowners, generally 62 or older, trade their equity for income.
With a reverse mortgage, a borrower can choose to receive regular monthly payments or open a line of credit. When the homeowner either moves or dies, the loan is paid back out of the proceeds of the property's sale.
Neither the borrower nor his or her heirs will ever have to pay back more than the value of the home. [If the loan exceeds the value of the home, FHA will pay the difference to the bank.] If the home sells for more than is owed, the borrower or the heirs keep the difference.
As the Cape experiences a rising tide of foreclosure proceedings, a reverse mortgage can, in some cases, provide homeowners with enough money to stay in their houses.
In other cases, reverse mortgage funds can pay off an existing home loan, making more money available for basic needs.
"Some people are just trying to pay off their mortgage which will free up money that they will then have to pay off the electric bill and the gas bill," said Cheryl Kramer, the program coordinator for the Housing Assistance Corp.'s Housing Consumer Education Center.
Reverse mortgages, however, are not without their downside, experts said. "I think people are expecting more of a magic bullet than they actually represent," Kosman said.
The fees for the loan can be very expensive. Closing costs often range between $10,000 and $17,000, Kramer said. And monthly insurance [ 1/2% per month FHA Ins. on borrowed amount] and administrative fees [usually $35/mo. servicing fee] can pile on even more cost. These fees are not paid up front, but are rolled into the loan, and can eat up available equity faster than the borrower expects or realizes.
"People don't realize that because they don't have to write a check," said David Cotney, the chief operations officer of the state Division of Banks. [Borrowers may make payments, if and when they wish, and there is no prepayment penalty when an FHA Reverse Mortgage is paid off early. If payments are made during the year, the interest may be deducted from taxes.]
Because the house...[may need]...to be sold to pay off the loan, a reverse mortgage can also prevent homeowners from passing a house on to their children. "If you really are adamant about leaving your home to your kids you may want to consider something else," Hicks said. [ If the borrowers want, they may refinance the house at any time; if the owners pass on and leave the home to the heirs, the heirs may sell or refinance the home, if the amount owed does not exceed the value of the house.]
As a general rule, a potential borrower should consider ...other options before resorting to a reverse mortgage, several experts said.
A reverse mortgage is really a last resort," Kosman said. "The longer you can defer them the more viable they are when you are finally obliged to use them." [Sometimes a senior must make a decision about selling off stocks or bonds, or getting a reverse mortgage, and should get advice as to what makes the most sense for them.]
Homeowners struggling with utility costs can explore energy assistance programs; those looking to do home repairs may qualify for low-interest federal or local loans.
The state requires all reverse mortgage borrowers to receive counseling from an approved agency, such as the Housing Assistance Corp., before completing the loan. At these sessions, trained counselors will make sure the homeowner understands all the features of the product and discuss posible alternatives.
Overall, area housing and financial experts agreed that reverse mortgages can be useful, but should be considered only with extreme caution...[just as any type of financing should be carefully considered].
.
"It can be a very valuable tool for keeping someone in their in their home and keeping them independent," Kosman said, "but it's not a panacea."
Reverse mortgage tips...
...Involve trusted advisors - family members, legal counsel, clergy - in your decision.
Be wary of any lender pushing too hard for a reverse mortgage. Be doubly skeptical of anyone suggesting you use the proceeds for some other investment.
Look closely at your budget to make sure a reverse mortgage is really needed.
Make sure all fees, insurance requirements and additional costs are explained clearly
Consider all your options. Other types of loans, assistance programs and grants may be available to help reduce your costs.
Showing posts with label HECM stocks bonds withdrawals. Show all posts
Showing posts with label HECM stocks bonds withdrawals. Show all posts
11/02/2008
10/17/2008
How Retirees Can Ease Pain of The Market Rout
By KELLY GREENE and ANNE TERGESEN
Wall Street Journal Article
Tuesday, October 14th, 2008
Turbulent markets are devastating for new retirees, since early losses can cripple the ability of a portfolio to generate enough income in decades to come. But retirees who flee from stocks to the relative safety of bonds and cash risk missing out on the historically higher average returns generated by stocks once they recover.
In most cases, there’s a better route for retirees to follow:
Give yourself a pay cut by withdrawing a little less today and continuing to take out less over the next several years. According to a new analysis by Baltimore-based financial-services firm T. Rowe Price Group Inc., this approach can help make a damaged portfolio still last a lifetime.
Bruce Hugill, 67, a retired financial planner in Tulsa, Okla., is trimming his annual withdrawal to 5.5% from 6%, even though his investments in oil and gas partnerships and variable annuities are holding up. “If you continue to take money out of your total portfolio as the balance declines, the account value will go down even faster,” he says.
Typically, retirees are advised to withdraw no more than 4% of their portfolios’ value in the first year of retirement, and then bump up that sum each year, typically in 3% increments, to keep pace with inflation. If you retired with $1 million in savings, for example, you could withdraw $40,000 in year one, $41,200 in year two and so forth, without running much risk of depleting your nest egg in your lifetime.
In fact, that approach would provide an 89% chance of sustaining an income stream for at least three decades, according to T. Rowe Price research, which simulated 10,000 potential market scenarios.
But what if you retired last year and your investments are suddenly worth $800,000 instead of $1 million? Unless you change your withdrawal strategy, your odds of running out of money rise sharply
“You have to understand that there are things you can control.
You can’t go through this in ignorance, and you have to understand that you are now in a high-risk position,” says Christine Fahlund, a senior financial planner for T. Rowe Price.
Even if the market manages a tepid recovery — for example, gaining an average 4% to 6% a year over the next five years — a retiree with a 20% loss would increase the risk of running out of money early by following the traditional withdrawal rate. Doing so would leave the retiree with a 49% chance of depleting a portfolio invested 55% in stocks and 45% in bonds, the T. Rowe Price model finds.
If your portfolio took a 30% loss, the news is much more grim: You’d have a 79% chance of running out of money prematurely if you continued a traditional withdrawal strategy.
So what can you do to make your savings last when a downturn hits your nest egg?
The easiest fix is to simply quit giving yourself a cost-of-living raise for the next five years. In other words, if you’re on track to take out $41,200 this year, stay at $40,000 instead. This would give you a 75% chance of sustaining your savings for 30 years, assuming a 20% loss followed by a slow recovery, according to T. Rowe Price.
But a 75% chance is not enough assurance for many people. What would you need to do to get back to a 9-in-10 chance of making your money last? Assuming you had experienced a 20% loss, you could still take withdrawals of almost 4%. But you would need to take them from your new, lower balance — not from the original nest egg.
So, rather than taking 4% of $1 million, you would need to scale back to taking 3.9% of $800,000. Doing so would give you only a $31,000 annual income, but would also allow you to increase your payments each year by 3%.
If you’d rather take a bit more money up front and forgo the inflation adjustment for several years, you could make an annual 4.4% withdrawal for each of the next five years, or $35,000 on an $800,000 portfolio.
In Scottsdale, Ariz., Stephen Martin, 63 years old, has decided to shave his retirement withdrawals to 3% from the traditional 4% after watching his portfolio lose about 15% this year through the week of Oct. 3 — the last time he had the courage to check, he says.
Now, the former chief financial officer of Xyterra Computing Inc. is cutting back on impulse buys and vacations.
Other retirees are forgoing retirement-savings withdrawals altogether. Katherine Sewell, a retired engineer in Edina, Minn., called her financial planner last Wednesday and halted all withdrawals from her retirement savings.
It’s the second time she’s taken such a drastic step: When her nest egg lost 40% in the tech downturn shortly after she retired eight years ago, she froze the account and went to work for a year as a cashier for Target Corp.
“So many of my friends are wringing their hands, worrying themselves into bad health, but not doing anything,” says the 68-year-old Ms. Sewell. “Or they’re running out and selling everything. Those are bad choices.”
Also stopping withdrawals is William Van Steenburgh, a Bellevue, Wash., resident who retired in 1984 from a company that’s now part of Qwest Communications International Inc. He hopes the move — which has reduced his income to a small pension with no inflation adjustment and Social Security — will help to preserve his disabled son’s inheritance.
“I would guess that we’ve cut back by close to 40%,” says Mr. Van Steenburgh, 83, who now takes the bus to save money on gas. “We stay at home and watch TV.”
By KELLY GREENE and ANNE TERGESEN
Wall Street Journal Article
Tuesday, October 14th, 2008
Turbulent markets are devastating for new retirees, since early losses can cripple the ability of a portfolio to generate enough income in decades to come. But retirees who flee from stocks to the relative safety of bonds and cash risk missing out on the historically higher average returns generated by stocks once they recover.
In most cases, there’s a better route for retirees to follow:
Give yourself a pay cut by withdrawing a little less today and continuing to take out less over the next several years. According to a new analysis by Baltimore-based financial-services firm T. Rowe Price Group Inc., this approach can help make a damaged portfolio still last a lifetime.
Bruce Hugill, 67, a retired financial planner in Tulsa, Okla., is trimming his annual withdrawal to 5.5% from 6%, even though his investments in oil and gas partnerships and variable annuities are holding up. “If you continue to take money out of your total portfolio as the balance declines, the account value will go down even faster,” he says.
Typically, retirees are advised to withdraw no more than 4% of their portfolios’ value in the first year of retirement, and then bump up that sum each year, typically in 3% increments, to keep pace with inflation. If you retired with $1 million in savings, for example, you could withdraw $40,000 in year one, $41,200 in year two and so forth, without running much risk of depleting your nest egg in your lifetime.
In fact, that approach would provide an 89% chance of sustaining an income stream for at least three decades, according to T. Rowe Price research, which simulated 10,000 potential market scenarios.
But what if you retired last year and your investments are suddenly worth $800,000 instead of $1 million? Unless you change your withdrawal strategy, your odds of running out of money rise sharply
“You have to understand that there are things you can control.
You can’t go through this in ignorance, and you have to understand that you are now in a high-risk position,” says Christine Fahlund, a senior financial planner for T. Rowe Price.
Even if the market manages a tepid recovery — for example, gaining an average 4% to 6% a year over the next five years — a retiree with a 20% loss would increase the risk of running out of money early by following the traditional withdrawal rate. Doing so would leave the retiree with a 49% chance of depleting a portfolio invested 55% in stocks and 45% in bonds, the T. Rowe Price model finds.
If your portfolio took a 30% loss, the news is much more grim: You’d have a 79% chance of running out of money prematurely if you continued a traditional withdrawal strategy.
So what can you do to make your savings last when a downturn hits your nest egg?
The easiest fix is to simply quit giving yourself a cost-of-living raise for the next five years. In other words, if you’re on track to take out $41,200 this year, stay at $40,000 instead. This would give you a 75% chance of sustaining your savings for 30 years, assuming a 20% loss followed by a slow recovery, according to T. Rowe Price.
But a 75% chance is not enough assurance for many people. What would you need to do to get back to a 9-in-10 chance of making your money last? Assuming you had experienced a 20% loss, you could still take withdrawals of almost 4%. But you would need to take them from your new, lower balance — not from the original nest egg.
So, rather than taking 4% of $1 million, you would need to scale back to taking 3.9% of $800,000. Doing so would give you only a $31,000 annual income, but would also allow you to increase your payments each year by 3%.
If you’d rather take a bit more money up front and forgo the inflation adjustment for several years, you could make an annual 4.4% withdrawal for each of the next five years, or $35,000 on an $800,000 portfolio.
In Scottsdale, Ariz., Stephen Martin, 63 years old, has decided to shave his retirement withdrawals to 3% from the traditional 4% after watching his portfolio lose about 15% this year through the week of Oct. 3 — the last time he had the courage to check, he says.
Now, the former chief financial officer of Xyterra Computing Inc. is cutting back on impulse buys and vacations.
Other retirees are forgoing retirement-savings withdrawals altogether. Katherine Sewell, a retired engineer in Edina, Minn., called her financial planner last Wednesday and halted all withdrawals from her retirement savings.
It’s the second time she’s taken such a drastic step: When her nest egg lost 40% in the tech downturn shortly after she retired eight years ago, she froze the account and went to work for a year as a cashier for Target Corp.
“So many of my friends are wringing their hands, worrying themselves into bad health, but not doing anything,” says the 68-year-old Ms. Sewell. “Or they’re running out and selling everything. Those are bad choices.”
Also stopping withdrawals is William Van Steenburgh, a Bellevue, Wash., resident who retired in 1984 from a company that’s now part of Qwest Communications International Inc. He hopes the move — which has reduced his income to a small pension with no inflation adjustment and Social Security — will help to preserve his disabled son’s inheritance.
“I would guess that we’ve cut back by close to 40%,” says Mr. Van Steenburgh, 83, who now takes the bus to save money on gas. “We stay at home and watch TV.”
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