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Monday, June 16, 2008
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Reverse mortgages could be big
by Stephen Butler
Johnny Carson was being interviewed on a park bench a few years
ago, and when he saw a pigeon strutting around his feet he looked
down at it and said, "Any messages for me?" About now,
he should be receiving one from Ed McMahon asking for a little
help with Ed's $600,000 home mortgage currently in default. After
listening to Ed and his wife on Larry King Live, I found myself
asking, "what ever happened to reverse mortgages?"
Well, my UC business school classmate, Jack Doyle, now a vice
president at Charles Schwab, had the answer: "Steve, he said,
reverse mortgages are about to become very, very big." They
are no longer controversial, and the biggest players in the financial
services industry are gearing up to provide them — starting
with the U.S. Department of Housing and Urban Development.
As the first baby boomers begin collecting Social Security, the
demand for this heretofore unsung financial product will soon
be huge.
Basically, a reverse mortgage is an opportunity to receive some
of the equity from your home, if you're 62 or over, without having
to sell the house. In effect, you are borrowing, but not in the
conventional sense of, say, a home equity loan that requires monthly
payments and some level of income to qualify.
Instead, a reverse mortgage allows people to remove a lump sum
of equity or receive the money in regular payments, and they never
have to pay anything back until they die or sell the house.
In the meantime, interest on the money loaned is accrued and
the lender gets everything back, plus interest, when the house
eventually sells.
The best part is that the loan can never go into default. No
one ever loses his or her home.
If a house finally sells for an amount less than the loan amount
plus all the interest that has been adding up over the years,
the U.S. Department of Housing and Urban development steps in
to guarantee any shortfall.
Here are some things to think about: In California, a couple
benefiting from a low property tax rate, thanks to Proposition
13, could be wise to keep rattling around in a house they've lived
in for eons.
To sell and then have what could be substantially higher property
taxes on a much smaller house would be a disadvantageous.
However, a reverse mortgage would allow them to take some cash
out of the property without triggering any taxable event.
Anytime after age 70, for instance, they might be wise to use
the cash to buy back into the higher Social Security payout schedule
that they would have had if they had waited until age 70 to start
collecting.
The lump sum cost is typically about $70,000 for a stream of
payments that will be 35 percent higher (and increasing with the
CPI) for the rest of their lives.
Another factor that augers well for reverse mortgages is the
extent to which the money, if used to supplement income, can effectively
prolong the point at which funds need to be drawn from retirement
plans.
The money in IRA's, 401(k)'s and other retirement plans is compounding
in a tax-deferred environment. The tax shelter offered by these
vehicles make them by far the most powerful as tools to offset
the ravages of inflation.
From '87 to '97, for example, relatively modest inflation reduced
the value of a dollar by about 30 percent. That retirement money
compounding tax-free is our best antidote to future inflation
costs.
Finally, someone in that health insurance "no-man's land"
between their last job and an age that qualifies them for Medicare
would be wise to consider a reverse mortgage to pay for at least
a high deductible health insurance plan.
An uninsured health problem could prompt the loss of an entire
house. It will be too late for reverse mortgages at that point.
Beware of anyone who wants to charge you for information that
is free from HUD.
Calling 1-800-569-4287 can put you in touch with the agency closest
to you. Another resource is the National Center for Home Equity
Conversion. The web-site is www.reverse.org.
I doubt if a reverse mortgage would have helped Ed McMahaon,
but he admitted that he had made some bad financial mistakes over
the years.
People with the most money sloshing around often make the biggest
mistakes, because they always figure "there's more where
that came from."
Meanwhile, those of us who've never won or promoted sweepstakes
have to watch our dollars carefully and consider our finances
like a spider web.
We touch one strand and the whole web jiggles. A reverse mortgage
may be the strand that positively impacts a few other sections
of the web.
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