Reverse mortgages are hot. Baby boom demographics, inadequate retirement funding, and problems in the traditional mortgage market (pushing brokers into alternate products) have combined to make marketing of reverse mortgage products to senior citizen homeowners one of the hottest niches in the mortgage business.

And the effort is paying off for marketers. Federally-insured Home Equity Conversion Mortgages (HECMs) are the predominant type of reverse mortgage in the U.S. Recently, the number of HECMs originated has averaged about 9,000 per month, more than double the average in 2005. Moreover, about two-thirds of the total HECM reverse mortgages ever issued have been originated in the last two years.

Reverse mortgages are only available to homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining. The sales pitch for these loans is enticing: tax-free retirement income for as long as you own the home – even for life; no monthly loan payments; no repayments until the home is sold, and payment options flexible enough to meet any need! In many cases a reverse mortgage is the ideal tool for senior homeowners.

But there is one big drawback with reverse mortgages: high up front closing costs that can sometimes reach $20,000 or more. Combined with the regular interest that accrues on the loan balance, the up front costs can make this an extremely expensive way to borrow. To spread these costs out and make the cost of borrowing reasonable, it is imperative that the borrower be confident in their ability to remain in the home for at least 5-7 years and, preferably, longer. Unfortunately, government data shows that most HECMs are paid off in seven years or less.

So, while a reverse mortgage may be a good fit for seniors in many situations, it is always important to carefully explore alternatives to see if a more cost-effective means to achieve your retirement financing goals is available.

We discuss below seven alternatives for you to consider:

1. Intra-Family Loan – Do you have a relative or friend with deep pockets and a good heart? An intra-family reverse mortgage loan can be an excellent way to gain the advantages of a reverse mortgage, but avoid most of the costs. The concept is straightforward: instead of a bank lending you retirement funds in exchange for a lien on the house, structure an arrangement with a relative or friend to lend you the money instead – collateralized with your home, of course. You can avoid most of the up front costs this way and have more flexibility to set interest rates and loan terms. There is even a company called Circle Lending (http://www.circlelending.com/familyadvantage/reverse-mortgage.asp) that specializes in drafting these loans as “official” arms length transactions and then provides monthly loan servicing just as a traditional lender would do.

2. Price Appreciation Agreement – There are also firms that will give you money today in exchange for an “equity-share” in the future appreciation of your home’s value. These programs are usually aimed at higher value homes (over $500,000) and may only be available in areas of the country with a track record of strong property value growth. The benefit of these programs is that you may be able to tap into your equity without the high up front costs of a reverse mortgage. The drawback is that it could cost you substantially more in the long run in the form of foregone home appreciation.

If you think this type of arrangement may be a good fit for you, here are two programs to look into to: Equity Key (http://www.equitykey.com/) and, Rex Agreement (http://www.rexagreement.com/)

3. Home Equity Line of Credit (HELOC) – As noted, reverse mortgages make most sense if the homeowner is able to remain the home for seven years or more. The reality, however, is that more than one-half of all HECM reverse mortgages terminate in less than seven years. To finance short and intermediate cash needs, a HELOC loan may provide a more cost-effective way to tap into your home equity. With a HELOC, closing costs are generally minor (sometimes zero). The downsides are two-fold: 1) there are monthly loan payments required and, 2) you will likely need to show the lender that you have adequate income to make the required loan payments.

An “interest-only” HELOC loan typically requires monthly payments equal only to the accumulated interest on the amount borrowed to date. With care it is possible to borrow an amount each month that provides cash for living expenses and is adequate to make the monthly interest-only payment. In this way the HELOC mimics a reverse mortgage with interest building up in the loan balance until the loan is repaid when the home is sold.

4. Delay Receipt of Social Security Benefits – The majority of Americans start their (reduced) social security benefit at the earliest possible age (62). While people may feel it is smart to “get the money while you can”, the truth is that Americans are living longer than ever before and the decision to take early social security can cost you several hundred dollars per month for the rest of your life. People in their seventies and eighties often feel a reverse mortgage is needed to close a budget gap – a gap that might not exist if they were receiving full social security benefits.

5. Sell and Downsize or Rent – Using home equity to help pay for retirement is not a new concept. For generations, it was common for elderly homeowners to sell their homes and use the proceeds to buy or rent a smaller, more affordable dwelling. This remains a viable strategy and one of the best methods available to ensure you get full use of your hard earned home equity.

It is sometimes possible to sell your home to an “investor” and who will then rent it back to you. This provides you with needed cash while allowing you to remain in the home. Investors like this type of transaction since they get a “good” tenant who likely will take good care of the property.

6. Deferred Payment Loans – Many states, local governments and nonprofit organizations sponsor loan programs for the benefit of “house rich, cash poor” senior homeowners. Much like reverse mortgages, these programs lend money today that is paid back when the senior homeowner sells the home or dies.

The drawbacks are: 1) the use of loan proceeds is usually restricted to a specific purpose (e.g. home repair, payment of property taxes or special assessments, etc.) and, 2) eligibility may be restricted to seniors qualifying as lower income.

Deferred loan programs often have very low (even zero) closing costs and interest rates. This which makes them an alternative worth looking into before deciding on a reverse mortgage. To find out what deferred loan payment programs are available in your area, contact the Area Agency on Aging (AAA) for your region (http://www.eldercare.gov/Eldercare/Public/Home.asp).

7. Other Assets – Home equity should be viewed as a financial asset on par with CDs, stocks, bonds, cash-value insurance policies or other investments you may own. Before deciding to “cash out” home equity with a reverse mortgage, compare this strategy to other possibilities like selling other financial assets you may own. Stocks and bonds can be turned into cash much more efficiently than home equity can.

Deciding whether to take out a reverse mortgage is an important financial step for both you and you heirs. Be sure to consider the alternatives before making a final decision.

About The Author
Tim Paul is a financial management executive with more than 25 years experience. His websites focus on personal finance issues and include: http://www.sagetips.com and http://www.reverse-mortgage-information.org.

Reverse mortgage loans are being touted as the ideal solution for older homeowners who may need extra income during their retirement years. On the surface, reverse mortgages seem to have no down sides. The homeowner receives a monthly payment from the bank, which allows them to remain in their home and pay expenses. There are no payments due as long as the homeowner remains in the home, at which time the loan is due and can be repaid by selling the home. A reverse mortgage loan agreement can seem like a godsend, but there are both pros and cons to reverse mortgage loans. A wise homeowner will do well to examine them carefully.

What is a reverse mortgage loan?

A reverse mortgage loan is a home loan that is paid out in monthly installments to the homeowner. No payments are due on the loan as long as the homeowner continues to live in the home as their primary residence.

What are the requirements for getting a reverse mortgage loan?

One of the earliest reverse home mortgages was created by the Federal Housing Administration (FHA). Since then, there have been specific requirements set up to qualify for a Home Equity Conversion Mortgage, more commonly called a reverse mortgage. In order to qualify for a reverse mortgage through the FHA:

- you must be at least sixty two years of age

- you must either own your home outright, or have a small amount remaining on your mortgage that can be paid off with the proceeds of the reverse mortgage

- you must live in the home

- the home must be either a single family home or a 1-4 unit multi-family home, with the owner occupying one of the units

- condominiums and manufactured homes that meet FHA standards may also qualify

- the homeowner must speak with an HUD-approved counselor before signing a reverse mortgage loan

What are the pros of a reverse mortgage loan?

Because reverse mortgages are designed to benefit seniors who want to remain in their homes, there are some very important benefits to a reverse mortgage. They include:

- There are no income requirements to qualify for a reverse mortgage loan, so it is easy to qualify for one.

- There are no payments due on the reverse mortgage as long as the homeowner continues to use that home as their primary residence.

- You can never owe more than the value of your home at the time that you (or your heirs) sell the home, even if the lending company has paid out more than the home is worth at sale time.

- You can choose one of several options to receive your loan, which makes it one of the most flexible home loans available.

- The reverse mortgage loan does not come due until the borrower (or borrowers, if there is more than one) dies, sells the home, or moves out of the home. At that point, the mortgage comes due in full.

- The homeowner can not be evicted from his or her home as long as insurance and taxes are kept current.

What are the cons of a reverse mortgage loan?

While reverse mortgages have many benefits, it is also crucial to look at their potential negatives. They include:

- Closing costs on a reverse mortgage loan can sometimes be twice as high as closing costs on a regular mortgage.

- If there is an outstanding mortgage or home loan, it must be paid off with proceeds from the loan at closing. Thus, if you can borrow $100,000, but have a $10,000 outstanding mortgage, you will need to take at least $10,000 in a lump sum payment to pay that off.

- The proceeds of the loan, whether in a lump sum payment or in monthly payments, may affect your eligibility for Medicaid or other state or federal aid payments.

- Your loan will come due when you no longer occupy it as your primary residence. At that point, you or your heirs will need to sell the house to repay any money that has been paid out. If you want your home to remain in the family, a reverse mortgage may not be the best plan for you.

Deciding whether or not to take out a reverse mortgage against your home is a complex decision with many pros and cons. The FHA requires that those considering reverse mortgages sit down with a home loan counselor and discuss all the ins and outs of the process. Take full advantage of the requirement to explore all the pros and cons of taking out a reverse mortgage so that you can make the best decision for your financial circumstances.

About The Author
Allan Young is a freelance writer who writes about financial products and specific services available from a mortgage lender .

Simply stated, a reverse mortgage is a loan that enables homeowners (age 62 and older) to convert part of the equity in their home into a tax-free income without having to sell the home, give up the title, or take on a new monthly mortgage payment. More and more homeowners are using this to supplement their retirement income, pay for health care, modify their home, or just get some cash for emergencies. Since this is a new product, some people have misconceptions of what a reverse mortgage is. The bank doesn’t give you money and take your house. Let’s look at some of the most common questions.

Are reverse mortgages for desperate people? No. It is an excellent financial planning tool used from people of all walks of life.

How do I qualify? You must be 62 or if both parties are on the mortgage, then you both must be at least 62. And, you must have equity in your home.

What if I still owe on my home? You may still qualify even if you have a balance on your first mortgage. The proceeds must be used to pay off the mortgage, first.

How much can I get? This depends on several factors such as, the age of your home, the value, your age at the time of closing, and interest rates.

Is it just monthly payments? No. You can get a lump sum, line of credit, monthly payments or a combination of monthly income and a line of credit.

But, won’t I have to pay taxes on these monthly payments to the government? No. The funds are tax-free. Its your money, not additional income.

Should I seek a lawyer or receive some counseling before I get a reverse mortgage. Yes. You must be counseled before receiving a reverse mortgage. You don’t have to talk to a lawyer or accountant, but it would be advised.

Who owns the title to my house? You still own the title.

What happens when I die? Once your home is passed on to your heirs, the mortgage becomes due. Your heirs may pay the mortgage and keep the home or sell the home and pay off the home. They may keep any excess sales proceeds.

What if I owe more than the house is worth? You can’t. Your repayment amount will never exceed the value of the home at the time the loan comes due. Also, there are no prepayment penalties.

What if I move? If you move, then the mortgage becomes due and must be repaid.

Where can I learn more? The National Reverse Mortgage Lenders Association at http://www.reversemortgage.org

About The Author
Stuart Simpson has a neat mortgage calculator FREE to use. Try it out at:
http://www.mortgage-refinance-review.com/calculator.php

How pensions work

On reaching retirement your accumulated pension fund is used to buy an annuity, this is an investment that pays a periodic sum for the life of the holder. A cash sum may also be withdrawn from the pension fund before annuity is purchased.

Your annuity does not have to be bought from the company(ies) that managed your pension fund. Shop around for the best deal.

There are various types of annuity. With a “flat rate” the amount of pension stays the same for the duration of the annuity (NB if there is inflation the actual value of pension falls). With an indexed annuity the pension rises with inflation (ie the pension maintains its buying power), however the initial rate of indexed annuity is lower than a “flat rate”. Some annuities offer widow’s benefits, ie a (possibly reduced) payment continues to a partner should the annuity holder pass away.

Company Pension Schemes

Where available these are generally a very good deal as the employer also contributes to your pension fund (possibly as much as – if not more than – the employee). There are 2 flavors: a) individuals builds a personal pension pot which is used to fund an annuity, b) final salary plan in which the actual pension based on employee’s final salary & length of scheme membership (regardless of actual amount paid in). Company pensions are often index-linked to rise with inflation. The final salary plan is generally regarded as a superior deal but is now being phased out by many employers.

Compounding

Returns on pension funds are compounded (re-invested). If you save $100 a month with 5% added at each year end: after 20 years you have $41,663, after 40 years you have $152,208. Invest for twice as long, get 3.65x the funds. To put it another way, if you saved $328.50 a month at 5% pa return for 40 years you’d build a retirement fund of $500,000. But if you delayed, you’d have to save $1200 a month over 20 years to accumulate the same amount! The effect of compounding means the sooner you start the better.

Tax breaks

Many governments offer some form of (often quite generous) tax incentive for pension savings. However, this comes with conditions, eg investments must be held in officially designated pension funds, funds may not be withdrawn until fund holder reaches a certain age (the may be some exceptions, eg for sportspeople who retire early).

Retirement Financial Planning as a Long-term Game

The timespan concerned means you can afford to be adventurous, particularly in the early days, as short-term volatility will tend to cancel itself out in favor of long-term rewards.

The stock market is a good core investment either through: a low cost market index tracker fund, or individual stocks and shares. If you choose the latter be sure to invest in a broad range of stocks, eg at least 12, across different industry sectors.

Avoid managed funds, fund managers are deleterious to your wealth and on average, after fees, fail to beat the market as a whole (of course some managers do beat the market in some years – by judgment or luck! – the problem is it’s impossible to tell in advance which ones they are).
 
Diversification into real estate, overseas investment etc is advisable. Pension funds can also include art & other collectibles – fine if you have specialist knowledge, otherwise best avoided.

Reverse Mortgage

For many people reaching retirement their largest asset is their home. Many older people move from (more expensive) larger houses to (cheaper) condominiums, thus releasing funds. Reverse mortgage schemes release capital on all or part of your home in return for an income for life. You are allowed to remain in your home as the scheme doesn’t get its share until you pass away. However, reverse mortgages will have a negative impact on your dependants’ inheritance.

First, the good news: From June 2007 through September 2008 (i.e., during the credit crisis) Income CEF payouts per share were virtually unchanged. From June 2008 through September 2008, payouts rose slightly— 29 funds raised their payouts and 17 lowered them. Your portfolio spending money should be higher than it was a year ago.

Brokerage firm monthly statements are designed to promote either fear or greed, depending on the current market environment. Nowhere on your statement can you find numbers that report your net investment, your total working capital, or your true asset allocation. Current and projected income numbers are given little attention, and monthly withdrawals are treated like losses of principal.

Income portfolios are reported upon using the same format as growth portfolios, and too much analysis is required to determine if the income production is either safe or adequate based on each investor’s personalized plan. Even for portfolios that, by design, are retirement income providers, sleep-inducing comfort information is not provided.

The most disconcerting column on the statement is the “Unrealized Gain/Loss Column”, particularly when you manage your portfolio according to the Working Capital Model. All profits of any magnitude are realized ASAP, and you should not expect a lot of your positions to be “in the black”. Wall Street statements create a perception that the red numbers are bad, without any analysis of what should be expected based on market conditions.

Wall Street has long ignored the income portion of the portfolio, combining it in overall totals and summaries to confuse and befuddle those who would prefer to have comfort and clarity on a more personalized level. Recently, some pretty boring securities have been speculatively sliced, diced, and re-formatted into MBWMFDs (Mortgage Based Weapons of Mass Financial Destruction), causing most income investors a great deal of discomfort.

The “Investment Grade Value Stock Expectation Analyzer” helps investors understand the market value movements of high quality equity securities. No statement should ever be a surprise— in either direction. A similar presentation for income CEFs cannot be produced for lack of a recognized content rating system. The statistics in the first paragraph are based on a portfolio of 114 managed income CEFs.

Income investing is naturally less risky than equity investing, except when the credit markets are in turmoil as they are today. Steps are being taken to reduce the problems, but no cure should really be expected overnight. There have always been two types of risk in income investing, and in that sense, nothing has changed.

(1) Credit risk involves the ability of corporations, government entities, and even individuals, to make good on their financial commitments; we minimize this risk by selecting only higher quality (investment grade) securities. Thus far, there have been extremely few actual defaults on high quality debt instruments— none, I believe, in the Municipal arena.

(2) Market risk, or the change in current market value, is uncontrollable and unavoidable, but the impact of loss can be minimized with proper diversification. There are many varieties of income producers ranging from corporate, municipal, and government debt, through various kinds of preferred securities, REITs and other real estate investments, royalty trusts, etc. Typically, IRE (interest rate expectations) moves these markets more than any other factor.

Understanding that market value changes are normal, and having a plan of action for dealing with such fluctuations, is essential. It is important to understand as well, that providers of non-market influenced savings vehicles like CDs must invest your money elsewhere to pay you the amounts that they promise. You have access to the very same investment vehicles— and without as much overhead.

Confucius say: Investor with income securities in safe deposit box is always happy— because he has no idea what the market value is, and the income keeps rolling in.

Monitoring investment performance the Wall Street way is inappropriate and problematic for income investors. It focuses on short-term dislocations and uncontrollable cyclical changes, producing constant disappointment and encouraging inappropriate transactional responses. But safe deposit boxes are inconvenient.  

One way to keep your eye on the income ball is to follow “Base Income” statement totals instead of market value totals. Base income includes only the dividends and interest produced by your portfolio and, if you don’t focus on it during market corrections, you can be certain that your portfolio income at retirement will be inadequate. A cost-based asset allocation formula is needed to grow your retirement income.

The income portion of the portfolio will grow better where the focus is on “working capital” instead of market value. This year, for example, I have seen fearful investors move from CEF portfolios of insured municipals yielding over 5% into 2% taxable CDs and Money Market funds— only because the fund market value has fallen in reaction to the credit crunch.

The market value myopia normally makes income securities more attractive at higher prices and lower yields, just as investors generally feel much safer throwing their money at the stock market when it is achieving new ATHs (All Time Highs). They do it all the time— this Wall Street conventional wisdom keeps most investors hypnotized forever.

A Working Capital Model approach to your income portfolio will keep you focused on the income and will make that whole retirement investing thing significantly less scary. As far as the stock market is concerned, this has now become the biggest investment opportunity in at least the last twenty-five years.

Wall Street, as preoccupied as most of it is with survival, hasn’t had a chance to tell you, and the media— well here’s that catastrophic hurricane they’ve been hoping for. Why aren’t you buying!

Steve Selengut
http://www.valuestockindex.com/
http://www.kiawahgolfinvestmentseminars.com
Professional Portfolio Management since 1979. Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

The good news about the Internet is the information we can get our cursors on instantly; the bad news is the information we can get our heads around instantly, but without any way of gauging accuracy, relevance, or completeness. This is particularly evident in the financial-investment-retirement world, where thousands of websites tell us how to do things and why, and why things work the way they do and how. Few gurus explain why and how certain concepts and plans of action just may not work the way they are supposed to.

Read Why 401(k) Retirement Plans Really Don’t Work in full

Steve Selengut http://www.sancoservices.com | http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979. Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

This is the situation that will be facing huge numbers of “baby boomers” over the next two decades, and with continuing improvements in medicine it’s never been more important to get your retirement plans right.

The second half of the game was the theme of a recent PBS broadcast by CPA and financial planner Ed Slott. It made disturbing viewing as Slott revealed the biggest threat to your hard-earned nest egg – the taxman!

But all is not lost. By playing that tax man at his own game you can legally minimize the tax man’s take and arrange your affairs so you get to keep most of your own money. Now is the time to start.

Find out more:

Your Complete Retirement Planning Road Map Ed Slott presents a comprehensive action plan for securing IRAs, 401(k)s, and other retirement plans for yourself and your family.

The Retirement Savings Time Bomb… and How to Defuse It Ed Slott’s five-step action plan for protecting your IRAs, 401(k)s, and other retirement plans from near annihilation by the taxman.

Parlay Your IRA into a Family Fortune Ed Slott shows readers how to choose the right financial advisor, manage vital information and deadlines, and create a retirement fortune that will not only benefit the individual, but continue to enrich beneficiaries for generations.