 |
Reverse Mortgages and Retirement Planning
Author: Shelby Smith  | Posted: 03-03-2008 | Comments: 0 | Views: 10 | Rating: (50)  (?) 
 There is currently a lot of talk in the press about how reverse mortgages can be used to supplement your retirement income. Some sources advocate the use of reverse mortgages while others preach against them. First of all, reverse mortgages, like virtually every investment or financial decision, are good for some and bad for others. How they apply to you depends on your circumstances and what you’re trying to accomplish. Let’s set the record straight on reverse mortgages and retirement planning.
A reverse mortgage, as the name implies, is the opposite of a regular mortgage. Instead of making monthly payments on your home mortgage, the equity you’ve build up in your home over the years pays you. To qualify for a reverse mortgage you must meet two conditions: first, every person on the deed must be age 62 or better, and second, you must have enough net equity in your home to make a reverse mortgage loan feasible. The same lenders that offer traditional, or forward, mortgages also offer reverse mortgages.
A reverse mortgage is not related to your ability to repay the loan, having a job, your income or net worth. The only requirement other than being age 62 or better is that the equity in your home must be sufficient to justify the reverse mortgage loan. When you apply for a reverse mortgage you’ll go through the normal steps of obtaining a mortgage: an appraisal, title search, confirmation of insurance coverage, inspection, etc. The reverse mortgage closing costs can be taken from the loan proceeds so you can avoid out-of-pocket costs.
The interest on a reverse mortgage loan is accrued and added to your loan balance. Accordingly, the loan balance will grow throughout the life of the reverse mortgage; however, you have no personal liability to repay the reverse mortgage since the home is the only collateral for the reverse mortgage loan. If the home is not sufficient to repay the reverse mortgage loan, the shortfall is not your concern. When you pass on or move on, the loan can be repaid from the sale of the home with any shortfall being the responsibility of the lender and any excess going to you or your estate. The reverse mortgage can also be repaid by getting another loan, paying the balance from your savings or investments or the children/beneficiaries could repay the loan and obtain clear title to the home.
You cannot be evicted nor can the you be foreclosed as long as you are alive, living in the home, maintaining your insurance coverage and keeping the home in reasonably good repair. If you are married, the reverse mortgage loan is not repayable until the death, or moving, of the last spouse. You can take the reverse mortgage loan proceeds, less closing costs, as a lump-sum, installment payments or have a line of credit established with the lender that you can access at any time. There are no restrictions on how you can use the money from a reverse mortgage: vacations, new car, investments, vacation home, giving money to children, or whatever. Before reverse mortgages you had access to the equity in your home only by selling (and generally moving) or by refinancing (meaning payments would start all over again). This third option — reverse mortgage — is something you need to know about and consider should you ever need the equity from your home to help improve your retirement lifestyle. The reverse mortgage allows you to stay in your home and turn your home equity into spendable cash for other uses. The question is: why would you do a reverse mortgage? First and foremost, you might need the money for retirement or to cover an emergency. Secondly, a reverse mortgage could be incorporated into your estate planning by using the equity in your home to purchase a paid-up life insurance policy to pay tax-free death benefits to your children, charity or beneficiary. Third, you just might want to splurge and take an around-the-world vacation, buy that sports car you’ve always wanted or buy a second home on the lake rather than leaving the equity in your home to be fought over by the kids.
A better question is: why would you not want take a reverse mortgage loan? Many retirees use a reverse mortgage loan to finance investments. In fact, the reverse mortgage specialist helping you might even recommend making an investment with the loan proceeds. Generally, this is not a good idea because rarely will the return from the investments cover the interest and closing costs associated with the reverse mortgage. Far too often, a retiree will unlock the equity in their home using a reverse mortgage loan and then turn right around and buy a long-term investment that keeps their money locked up and out of their reach. This is generally a bad idea.
The one exception that oftentimes makes a great deal of sense is using the reverse mortgage money to purchase a guaranteed lifetime income to supplement your Social Security or other retirement income. A guaranteed lifetme income is generally obtained by purchasing an annuity from a life insurance company. Annuities now allow you to obtain a guaranteed lifetime income but still retain control of your money in case you change your mind about the lifetime income, need a lump sum to cover an emergency or get an opportunity to purchase a higher lifetime income should the economic/financial picture change. By using the reverse mortgage loan, which you do not have to repay during your lifetime, to purchase a guaranteed lifetime income you cannot outlive, you could remove the anxiety and fear of running out of money before your death. All the while you are assured of a place to live, no mortgage payments and the peace of mind of knowing that you’ll have a new income source for the remainder of your life.
The reverse mortgage loan is a great tool that can be used to improve your retirement and you definitely should learn more. But, before taking out a reverse mortgage loan make sure you have a sound reason and have a definite non-risky use for the money or need extra income to supplement your retirement income. If you simply want to “be prepared” just in case you need money for an emergency, leave the reverse mortgage money in a line of credit at the lender.
Generally, the costs associated with a reverse mortgage are no greater than you’d incur if you sold your home to free up the equity, but shop the market for the lowest closing costs. Also, there are several programs – some government sponsored while others are private – and you’ll want to review all your options. Again, don’t do a reverse mortgage just because you want to take the money and invest it hoping to “beat the market” or speculate you’ll make a higher return than the reverse mortgage loan is costing. Also, make sure you get professional help by talking to your banker or financial advisor before proceeding.
Have questions about your retirement investments? View questions and answers in our Expert Archive that we've given to others inquiring about their retirement investments: http://www.theretirementpros.com/ask_expert.php
Join Dr. Shelby Smith's video seminar online (usually 10 min long or less) on safe retirement planning: http://www.theretirementpros.com/Tele-Seminar-MRM.php
------------------------------------------------------------------------------------
Rate this Article:
Current: 0 / 5 stars - 0 vote(s).
Article Source: http://www.articlesbase.com/personal-finance-articles/reverse-mortgages-and-retirement-planning-349205.html
About the Author:Dr. Shelby Smith has an earned Doctorate in Economics from Iowa State University of Science and Technology along with a Bachelor’s and Masters degree in Economics from the University of Wyoming. He started his professional career as a college professor and held professorships at several Midwestern and Southern universities. He entered the corporate arena as the Chief Economist of a Regional Federal Home Loan Bank, moved then into the banking business where he served as Economists, Chief Financial Officer, President & CEO, and Chairman of several institutions. He started a financial marketing company that catered to financial institutions and their clients by providing investment products. For the past twenty years Dr. Smith has been providing consultation and services to conservative investors and savers positioning their assets for retirement. In the process Dr. Smith has managed a broker dealer and held licenses that allowed him to offer securities and insurance products to the general public. He is currently the “ask the expert” at the Retirement Pros, a senior officer at BHC Marketing, Ltd., and writes newsletters and other retirement articles for the retirement-minded.
|
Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free! |
|
Related Articles
Difference Between Retirement Plans
By: Christee Fontanez | 07/03/2008 | Investing
It is important to make good choices when it comes to saving for your retirement. But what are the differences between the various retirement plans out there?
How To Defer Capital Gains On Real Estate Sales With A Private Annuity Trust
By: Christine Harrell | 29/09/2006 | Finance
Over the past several years, many people have made big profits in the real estate boom-at least on paper, before calculating the capital gains tax owed. Now that the real estate market is leveling off, and even predicted to dip, many property owners are beginning to realize that once taxes are paid, the remaining balance is far less than they anticipated.
How To Regain Control Of Your Real Estate Investment Choices While Avoiding Capital Gains
By: Christine Harrell | 29/09/2006 | Investing
The past several years have been very profitable for many real estate investors. But the market is changing and it may be time for many investors to be on the lookout for a new strategy.
How To Sell Assets Without Fear Of Capital Gains Tax
By: Christine Harrell | 20/10/2006 | Non-Fiction
Assets we own that have appreciated in value make us tremendously happy. The taxes we pay on these gains make us tremendously unhappy. If you own appreciated assets such as real estate, business, fine art, jewelry, planes, boats, or even a race horses, you face a large tax bill if you sell these assets and do not plan properly.
Estate Planning: Avoiding Probate
By: Robert Valentine | 21/09/2006 | Finance
Probate can be costly and time consuming. We'll show you a few potential ways to save.
Estate Planning: Before You Begin
By: Robert Valentine | 26/09/2006 | Finance
Leaving a proper legacy has become a science. Here are the basics to help get you started.
Estate Planning: An Introduction to your Legacy
By: Robert Valentine | 24/10/2006 | Finance
Estate planning can be difficult and confusing. Here are the four basic ways to plan.
Capital Gains Deferral Strategies Gives Real Estate Investors The Freedom Of Choice
By: Christine Harrell | 02/02/2007 | Non-Fiction
While the 1031 deferred exchange is a viable means for some real estate owners and investors, many are finding the stringent requirements and the lack of quality properties a barrier to successful completion of a 1031 exchange.
Got a Question? Ask.
Ask the community a question about this article:
Frequently Asked Questions
VA Guaranteed Income/Withdrawal Benefits - withdrawal comparisons.
By: jsmith9528 | 21-07-2008
The Allianz Alterity VA permits the Withdrawal of their high contract value over as few as 10 years. Are there any other companies that offer this? All others I have seen require 20 yrs to life. (Sound like a prison sentence does'nt it?)
Thanks,
Jim Smith
jsmith9528@aol.com
Who to contact re/property
By: kgarcia | 21-07-2008
I am aware of property in my neighborhood that is held by Fremont Investment and Loan. Before it is completly ravaged and ruined I am very interested in investing in it. I have not seen any activity and it needs some TLC quick to restore it. I have lived in the neighborhood for 19 years. Plz advise who to contact.
Are there guidelines for a Section 8 landlord to ...
By: Sparky | 20-07-2008
Are there guidelines for a Section 8 landlord to know about as a tenant is moving out?
Looking for an investment club in Evanston Il to ...
By: philfarish | 19-07-2008
Looking for an investment club in Evanston Il to join
investment account
By: TamiLStorey | 17-07-2008
Where can I open an online investment account with AMTRUSTDIRECT.COM
College money safe haven in volatile times
By: fran | 16-07-2008
Where is the best(safe, interest bearing and fairly liquid) place to put college money for child starting out in college this fall?
Q&A Powered by: 
Latest Personal Finance Articles
Banking Services in India: Chasing New Heights
By: Addi | 24/07/2008
With time, banking has emerged as a major sector which is constantly expanding and is earning mammoth profit throughout the year. This industry is facing cut throat competition with increasing involvement of common man in them who are in turn attracted by the facilities they are being offered.
Saving Money on Groceries - the Price Book- Part III
By: CD Mohatta | 24/07/2008
I add items to my price book gradually. Say this week I'm thinking to buy canned pumpkin. Well I don't buy that often so it may not be in my book. If I don't need it right away, the next time I'm at a store I'll just enter the price into my book and pass it up, and check out other stores as I find myself at them.
Saving Money on Groceries - the Price Book- Part 4
By: CD Mohatta | 24/07/2008
Now something I noticed that is related to keeping a price book are the membership-required stores and warehouses. Too often people are misled into thinking they are getting better prices there, when in actuality they are forgetting to include their membership price as part of their cost of food. Let me give you an example.
Saving Money on Groceries - the Price Book- Part 2
By: CD Mohatta | 24/07/2008
So for example, here are some entries in my price book, each entered under the appropriate page so that I can find it quickly.
Saving Money on Groceries - the Price Book- Part 1
By: CD Mohatta | 24/07/2008
The most useful tool I've found for reducing my grocery costs is to keep a "price book." I first heard about the idea from Amy Dacyzn (pronounced "decision"), author of the Tightwad Gazette. She went from rags to riches (she has 6 kids, too!) by being a tightwad.
Mind Over Money
By: Chad Sunyich | 24/07/2008
Success in America means different things to different people but generally comes down to achieving our desires, or how much control we have over the important things in our life, whether it is acquiring real estate, spending time with family or the freedom to pursue your dreams. To quote a very successful author, “There is no desire that anyone holds for any other reason than that they believe they will feel better in the achievement of it.
Credit Repair Companies - Scams or Savours...
By: Geoff Morris | 24/07/2008
Caught out with a bad or detrimental credit file and don't know what to do? This article looks at the rather tarnished reputation that credit repair companies seem to have got for themselves, and some timely advice on what you should do.
Payday Loans The Instant Cash Advance
By: Caroline South | 24/07/2008
No matter how carefully you plan ahead you can never prepare for every eventuality that life reveals to you. There are times you may think fate is conspiring against you , it may seem like that but everybody experiences events in their life they can often well do without.
More from Shelby Smith
Stagflation and Retirement Planning
By: Shelby Smith | 29/02/2008 | Finance
Lately there have been a lot of references to “stagflation” when describing the current economic outlook. Webster’s defines stagflation as: an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity. In other words, there are a lot of people who are out of work but prices are increasing like there is too much money chasing too few goods. What does this mean for your retirement planning?
An Uncertain Economy & Your Retirement Money
By: Shelby Smith | 29/02/2008 | Personal Finance
Many of you are in the red zone right before retirement, or you've already retired. No doubt your number one fear is running out of money in retirement. You're part of a very large and growing demographic force: 35 million over age 65, 50 million drawing Social Security and 78 million baby boomers now turning 62. This means the future demand for everything used by the "retirement set" will increase, and "retirement prices" will rise dramatically. Many of you ...
Comparing Lifetime Income Options
By: Shelby Smith | 29/02/2008 | Investing
Longevity risk is the greatest fear of most retirees. You can now buy insurance to protect you from longevity risk: the risk of outliving you money. Just like you insure your home, car, health, etc. from the expenses of loss, insurance companies now offer annuities to protect you in retirement. What's more ...
The Guide to Social Security - How to Pay Fewer Taxes
By: Shelby Smith | 05/02/2008 | Personal Finance
Most individuals in or near retirement have three financial legs to support them in retirement: Social Security benefits; qualified retirement savings [401(k), IRA, 403(b), etc.] on which taxes have not yet been paid; non-qualified savings and investments on which taxes have been paid on the principal and possibly some or all of the earnings. By carefully coordinating the use of these three sources of money, the typical retirement-minded couple can add up to 20% to their after-tax income and ...
Conflicting Investment Advice - Who Knows Best?
By: Shelby Smith | 01/02/2008 | Investing
If you've spent a lifetime of scrimping and scrapping to build a retirement nest egg, the last thing in the world you want to do is expose it to risk of loss. You don't want to lose any of it, let alone most or all of it. But, sometimes we do things that are not good for us because we're not fully aware of the dangers. This includes not faithfully getting medical checkups, driving too fast at night on rain-slick roads, and...
Rolling Over 401(k) at Ex-employer
By: Shelby Smith | 31/01/2008 | Personal Finance
I'm always being asked whether or not to move a 401(k) or other employer-sponsored pension plans when leaving an employer. Generally the answer is "move your pension money when you leave an employer". Here are some advantages of moving a 401(k) rather than leaving it
The Big Investment Mistakes Made in Retirement
By: Shelby Smith | 30/01/2008 | Investing
We all want the highest interest rate possible and the lowest risk possible - unfortunately these are competing objectives. High rates always spell high risk BUT high risk does not always spell high rates. You should know that risk and reward are traveling companions: if you want low risk you've got to settle for low rates and if you want the chance of making high rates you've got to accept high risk.
When to Take Social Security
By: Shelby Smith | 29/01/2008 | Personal Finance
One of the most important retirement decisions facing most Americans is: WHEN TO START SOCIAL SECURITY BENEFITS. Conventional wisdom has always been "take it as early as possible -- age 62". Why? Several reasons are given: (a) it might not be there if you wait; (b) you can take the benefits and invest them and...
|
|
Finance 
