The Rewards and Risks

One of the greatest challenges facing retirees, particularly in today’s low-interest rate environment, is generating sufficient income for everyday living expenses. And for the 41% of Americans aged 55 to 64 with no retirement savings, their home may become their most effective way to fund retirement.

The combination of those two trends makes reverse mortgages so appealing to so many people. With a reverse mortgage, a homeowner age 62 or older can turn the value of his or her home into cash, without having to make monthly payments or moving. You can take the cash as a lump sum, in equal installments, or as needed through a line of credit.

As Walter Updegrave recently noted in his RealDealRetirement blog, a 65-year-old with a $250,000 home might be able to borrow up to $127,000 through a reverse mortgage, according to the Boston College Center for Retirement Research.

But reverse mortgages have drawbacks, too.

A reverse mortgage can be an extremely expensive and tricky way to borrow, so you need to understand the risks and costs before proceeding. It ensures that a significant portion of your home equity will be given to the bank in the form of fees and interest, rather than to your own retirement funds or your estate.

Implications For Your Family

A reverse mortgage can also have serious implications for your surviving spouse and family after you die — a family member living in the house who didn’t go in on the loan could be forced to move out — so you’ll need to factor this in when deciding whether to sign up.

It’s not too surprising that The Consumer Financial Protection Bureau (CFPB) has received 1,200 reverse mortgage complaints since December 2011, according to the federal agency’s recent report about them. As the report said: “Many older consumers and their families are confused and frustrated by the terms and conditions of reverse mortgages.”

Reverse Mortgage Terms and Fees

With a reverse mortgage, you remain the owner of your home. You convert your equity into cash and the loan doesn’t need to be repaid until the last surviving borrower dies, sells the home or moves out.

In most cases, however, the lender can terminate the loan if you fail to pay your property taxes or homeowner’s insurance or don’t maintain your home.

The costs of a reverse mortgage are significant, especially in the first year. Interest rates tend to be higher than on standard mortgages and interest is generally compounding. In addition, there are a number of required upfront costs, including:

A mortgage origination premium: Most reverse mortgages are federally insured and the borrower pays for that insurance. The cost is 0.5% of the appraised value of the home (up to $625,500) if you borrow less than 60% of your initial principal limit during the first 12 months. If you borrow more than that, you’ll have to pay a steep 2.5%.

Origination fee: The lender can charge up to $6,000 to compensate for the cost of processing the loan. The size of the fee depends on your home’s value.

Closing costs: Their amount varies, too, but they’re similar to what you’d pay for a traditional mortgage. You’ll likely pay for a credit check, an appraisal, a title search, a survey, an inspection, a recording fee, taxes and other fees.

Once you have the loan, you’ll be charged interest on the amount borrowed (which includes an annual mortgage insurance premium) plus up to $35 a month in fees.

Eligibility and Counseling

Due to a recent change in the rules, to qualify for a reverse mortgage, you’ll need to prove that you can afford to pay the property taxes and homeowner’s insurance from your retirement income. The lender will review your income, assets and credit history to make the determination.

Also, before you get the reverse mortgage, you need to get counseling about it from a U.S. Department of Housing and Urban Development (HUD) sanctioned counselor. To find one, you’d go to HUD’s website or call 800-569-4287.

Key Risks to Consider

At the end of the loan, your home is typically sold and the proceeds are used to pay off the mortgage. Because of the large upfront costs and the compounding interest, a significant portion of your equity will be used to pay the interest and fees. That means you’ll be significantly reducing any inheritance you hope to leave to your surviving spouse, family or charity.

Another risk is the possibility that your spouse will be forced to sell your home or deal with foreclosure proceedings if she or he didn’t take out the reverse mortgage with you. At the very least, you’ll want to speak to any family member living in the home who wasn’t a co-borrower to make sure they have a plan once you die.

In the CFPB’s report, many reverse mortgage borrowers complained they couldn’t refinance the loans because they didn’t have enough equity in their homes. The lesson: Don’t underestimate how quickly a reverse mortgage’s compounding interest erodes your equity.

Another big complaint: reverse mortgage lenders refusal to let the borrowers change the terms of their loans by, say, lowering the interest rate or adding borrowers to the loan to ensure they wouldn’t be evicted when the original borrower dies.

If you have a problem with a reverse mortgage, submit a complaint to the CFPB online or call 855-411-2372. The agency says it will work to get you a response within 15 days.

The Bottom Line

Here’s the bottom line: Years of hard work created your home equity and you should make the most of that money during your retirement.

Before deciding to use a reverse mortgage to fund your ongoing retirement income needs, think hard about whether you might rather sell your home and downsize to free up some cash. Or you might consider either taking out a new mortgage and getting a lump-sum payment through a cash-out refinance or getting a tax-deductible home-equity loan or home-equity line.

 

 

 

 

All copyright credits to Nick Clements
www.forbes.com
Nick Clements is a Next Avenue contributor and a former banker turned consumer advocate and co-founder of MagnifyMoney.com, a site to compare financial products, receive personalized recommendations and save money. He writes a regular column for DailyFinance.com in addition to daily blog posts on Magnify Money’s Fine Print Blog.

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How to Eliminate Mortgage Years

When you take out a 30-year mortgage, or mortgage with other term, your bank calculates a monthly payment that contains both the interest you owe on the money you borrowed and some extra that gets applied to what you owe. As you make your payments, you pay more principal and less interest until the loan gradually gets paid off. Paying extra towards principal every month can take years off of the life of your mortgage and get you out of mortgage debt more quickly.

1. Review your loan’s statement to get its initial balance, monthly principal and interest payment and interest rate. You will need this data to calculate the impact of a higher payment.

2. Open a blank spreadsheet.

3. Enter your interest rate in the following format “x%” in cell A1. For example, if your loan has a 5.25 percent interest rate, you would enter “5.25%” in that cell. Omit any quotation marks.

4. Enter the amount you’d like to pay every month in cell A2. You should enter an amount that is equal to or greater than your current monthly payment. For example, if you want to pay $200 extra a month and your payment is $1,380, you’d enter “1580.” If you’d prefer to have the spreadsheet do the math for you, enter your payment and the extra in this format: “=1380+200.”

5. Enter your original loan balance as a negative number in cell A3. For example, if you originally borrowed $250,000, you would enter “-250000” in cell A3.

6. Enter the formula to calculate the length of the loan in cell A4. On Excel or Google Spreadsheet, you would enter “=NPER(A1/12,A2,A3)” while you’d enter “=NPER(A1; A2; A3;)” in OpenOffice.org.

7. Enter “=A4/12” in cell A5 to find out how many years it will take you to pay off your mortgage at the new payment. For example, if the cell reads “22.496,” you will pay off your mortgage in approximately 22-and-a-half years.

8. Change the value in cell A2 to see how a different payment amount will affect how long it takes to pay off your mortgage until you find a payment that meets your monthly cashflow requirements and that will take enough years off of your mortgage.

9. Make your calculated monthly payment every month. When you make the payment, let your lender know that you want the extra applied to your loan’s principal. You may need to call the lender to find out how to accomplish this.

Things You Will Need

  • Spreadsheet
  • Mortgage loan statement

Warning

  • If you have a prepayment penalty, your bank may charge you for paying extra principal. Confirm that your loan doesn’t have a prepayment penalty before making extra payments.

 

All copyright credits by Steve Lander, Demand Media

http://homeguides.sfgate.com/eliminate-mortgage-years-72233.html

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How to Retire With More Money Than You Thought Possible

directory-1334441_1920If you’re worried about the prospect of retiring without enough money to sustain your current lifestyle, you’re not alone. A large percentage of Americans face the same dire situation, with a massive decrease in disposable income very likely the moment they retire from the workforce.

However, there are ways you can increase your retirement savings so that you don’t need to struggle financially during your golden years. The key is to make a realistic plan based around your current income and then work on ways to build up what you already have.

Contribute to Your 401(k)

Consider contributing a small portion of your salary into your 401(k). This doesn’t need to be a lot of money to begin with, but every cent extra you contribute will add up over a number of years to quite a lot of money. Whatever amounts you can contribute into your 401(k) are tax deductible, so you’ll be reducing your taxable income as a bonus. Aside from this, you may also receive a matching contribution from your employer, which effectively doubles your contribution.

Take Advantage of Tax Breaks

If you opt for a traditional IRA you could take advantage of their tax-deferred growth benefit. This simply means you don’t pay any taxes on the gains your investments make until after you withdraw from it. In some cases, your contributions into a traditional IRA may also be tax deductible.

By comparison, contributing to a Roth IRA isn’t tax deductible but you don’t pay any tax when you do withdraw from it. If you anticipate plenty of growth in your Roth IRA over a number of years, you can take advantage of the tax-free growth benefit.

Start an Emergency Savings Plan

money-1270298_1920Many people put as much money as they can into their retirement savings but they don’t have much left to form an emergency savings fund. It’s important that you find ways to increase the amount of savings you have in available cash. This can be crucial for paying those unexpected bills or other costs that arise from time to time.

Put away a comfortable amount of money on a regular basis into a high interest bearing savings account. Only withdraw from this in the case of an emergency.

Reduce Debts 

If you’re planning for a comfortable retirement, you really should include a debt reduction plan in your strategy. This means clearing out any credit cards, personal loans or traditional mortgages you’re still paying off.

You’ll place less of a strain on your retirement income if you don’t need to make regular repayments on outstanding debts.

Consider a Reverse Mortgage

It is possible for some people to convert a portion of their equity into cash after retirement using a reverse mortgage. This type of mortgage doesn’t require you to make regular repayments on it, but you are able to use the money for whatever purpose you want.

This means you can use it to supplement your retirement income, or use it to invest in other things to increase your retirement savings.

Talk to a Professional

phone-388838_1280Perhaps the best thing you can do for your retirement fund is to discuss your plans and goals with a professional. By talking to a professional, you may find there are other options open to you that you may not have previously considered. You may also receive more tips that are pertinent to your individual situation.

Work on putting these tips into practice with your own budget. Even small steps in the right direction can add up to big benefits in the long run, so don’t discount even those small things you do. They all help you reach your financial goals in the end.

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5 Important Facts About Reverse Mortgages

money-1017463_960_720Reverse mortgages are an excellent financial tool when used properly, but they are only applicable to certain situations. With a reverse mortgage, the homeowner receives either a lump sum or installment loan based on the value of their property. The lending institution then places a lien on the property, and ownership of the property transitions to the lending institution once the homeowner leaves the property.

1. The Homeowner Must Be a Certain Age to Qualify

Reverse mortgages are a highly regulated industry, and only those who are over 62 can apply for a reverse mortgage. Reverse mortgages are usually used to give someone who is already retired enough money to live on and a roof over their head.

2. The Reverse Mortgage Can Be Paid In Different Ways

Reverse mortgages allow many options for payments. The homeowner can decide to receive a cash-1169650_960_720lump sum, monthly installments, or even to use the reverse mortgage as a credit line. Different homeowners may prefer different payment solutions, and larger amounts of money are sometimes available depending on the type of solution that the homeowner prefers. In general, monthly installment payments will eventually offer the homeowner more money than a lump sum payment, but a lump sum payment will allow the homeowner to reinvest the money.

3. Loan Amounts Are Based On Property Value

When a reverse mortgage amount is calculated, the reverse mortgage company uses the property value and then subtracts their fees, similar to how a real estate agent would take a commission or a mortgage company would charge loan initiation fees. While a homeowner may not receive as much money through a reverse mortgage as through a direct sale, they do receive the very large benefit of not having to find another home to rent.

4. Homeowners Do Not Have To Vacate

One of the most important aspects of reverse mortgages is that the owner does not have to ever vacate the property until they chose to do so. This means that the homeowner gets all the positive aspects of selling their home without any of the negative aspects.

5. Reverse Mortgages Don’t Count As Income

One thing that many homeowners mistakenly assume is that a reverse mortgage will count as income once tax season rolls around. Because a reverse mortgage is actually considered a loan, no income taxes need to be paid upon it. The loan will be paid off once the property is acquired by the loan company and no real profit will be made by the homeowner. This means that all the money that is received from the reverse mortgage can go to the homeowner’s expenses.

Reverse mortgages are most often used if a retiree needs extra income to keep their existing lifestyle but also does not wish to lose their home. For retirees that already have another place to live, it may be a better financial decision to sell the property outright and then move. Everyone’s financial situation is different, so all options should be considered when making such an important decision.

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Reverse Mortgage Advantages

Get misuse or settle monetary responsibility and make no settlements

  • For as prolonged as you remain in your house or keep the financing
  • Lasts as extensive as one residence proprietor remains
  • Providing establishment might not require any type of type of settlements with little resident dedications

Complete security

  • With hardly any demands, the loan provider can never ever before take your residence
  • No alteration to the title– car loan company obtains simply a home mortgage lien
  • The extra cash might assist you to maintain your self-direction as well as security

You Remain in Control

  • You select simply just how much equity you will absolutely take advantage of or leave to your recipients
  • You manage exactly what does it set you back?, or simply exactly how little, finance you protect of your equity
  • Leave the big mass or little of your equity
  • Typical funding limitations generally quit you from making use of all your residence equity

Safety and security as well as Fairness

  • Federal federal government established, exceptionally handled, along with extensively exposed house mortgage program
  • Independent treatment is continuously required before the financing treatment is complete
  • Fair in addition to practical solution acquisition– providing organization is repaid simply specifically just what it is owed
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Economic Woes Make Reverse Mortgages More Attractive to Seniors

According to the Bureau of Labor Statistics, there is no inflation in today’s economy. Social Security COLA increases, which are tied to inflation, have been held to a mere 1.5%. However, grocery shoppers and those people driving gas-consuming automobiles have seen the prices of food and energy increase dramatically over the past three years.  For working families, this translates into serious belt-tightening in the area of disposable spending such as entertainment and dining out. For senior citizens and others on fixed incomes, this results in lowered living standards and induces the fear of running out of money during one’s lifetime..

Even seniors who have accumulated a healthy portfolio of stocks, bonds and savings are feeling an economic pinch. The stock market crash of 2008 that was triggered by the meltdown in the financial sector have served to rock what was once a plump, dividend-paying portfolio that either supplemented or replaced Social Security as the primary source of income. For example, one of the bluest of blue-chip stocks, Bank of America, cut its quarterly dividend from 60 cents per share to 1 cent per share after accepting TARP funds.  Interest yields from CDs and government-issued bonds went from 5% per year to less than 1% per year. Seniors depending on dividend and interest income to pay for housing, purchase groceries or cover utility bills had those incomes cut by 80%.. Because these same people owned assets, they were also outside the bounds of traditional “safety net” social welfare programs.  This combination of economic cataclysms has made the reverse mortgage look like a very inviting method for increasing cash flow.

A reverse mortgage is a collateralized loan that is available to homeowners 62 years or older that allows the person to borrow against the value of their primary residence and receive either a monthly annuity or a lump-sum payment.  As long as the borrower stays in his or her home, the loan does not have to be paid back. Once the home is sold, the debt plus interest is repaid to the lender, and any remaining value goes to the seller. The income from a reverse mortgage is tax free, does not affect Social Security, and there are no restrictions on how the income is used.  A reverse mortgage offers seniors supplemental income that can help maintain a good quality of life when other sources of income have failed.

There are no income restrictions on applying for a reverse mortgage. Although it is possible to apply for a reverse mortgage at age 62, lenders index the loan amount against the applicant’s age. The younger the borrower, the less they will be allowed to borrow. A borrower must also carry property insurance, property taxes must be paid up to date and the residence be maintained adequately. A borrower also cannot have any Federal liens on his or her income, such as for unpaid income tax.  A low prevailing interest rate works to the borrower’s favor because a lender is likely to approve a higher loan amount.

Most reverse mortgages are backed by the agency for Housing and Urban Development (HUD). This means that a home or condominium must be HUD-eligible in order to qualify for a reverse mortgage. HUD also requires that borrowers attend a counseling session in order to ensure they fully understand the program, the costs involved to apply and the potential consequences of having a reverse mortgage.

There are a number of fees involved in applying for a reverse mortgage. These include an up-front fee known as a mortgage insurance premium (MIP). The MIP insures the lender against the risks of the loan, and can be as high as 2% of the home’s value.   In addition, there are loan origination fees, loan servicing fees and third party fees for the appraisal, title search, property survey, inspections and credit checks. HUD offers a SAVER reverse mortgage that has much lower initial fees but also reduces the amount of money that can be borrowed.  Borrowers who are already having a hard time making ends meet may not have the funds available to pay all of the fees due at closing and if fees are taken out of the borrowed amount, will find the amount they receive is substantially lower than they expected.

Once the loan is approved, the payout can be received either as a lump sum, as an annuity with equal monthly payments or as a line of credit in which installments are paid out at the time of a borrower’s choosing. Even though advertising suggests otherwise, payments from a reverse mortgage don’t offer carte blanche for reckless spending. They should be used to pay off unsecured debt such as credit card balances, medical expenses not covered by insurance or used to create or maintain an emergency fund for home repairs and maintenance. Funding a luxury cruise or gambling junket to Las Vegas with money borrowed against a home is foolish and this kind of spending is likely to encumber the homeowner’s or heirs with an overleveraged asset that must be sold within the 6 month time frame allowed under the contract.

A reverse mortgage may be a good fit for the senior who is house rich and cash poor, but he or she should consider other options before using a home as loan collateral. Selling the home outright and downsizing to a more affordable property or taking on a part-time job may be more constructive ways for healthy seniors to increase cash flow and meet spending needs.

 


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