Bruce Williams
http://www.NewsAndOpinion.com |
DEAR BRUCE: My wife and I have discussed reverse mortgages several times, and we think they seem too good to be true, like there must be a gimmick or something.
Tell me more about them. Do you ever have to pay the money back, and how do the lenders make their money? What are the advantages and/or disadvantages? It seems that all we see in the paper is how someone misused a reverse mortgage, but we all know that anyone can misuse a good program and blame the program.
We are interested only in the extra available funds each month from having our mortgages paid off. We are strapped for cash every month. Thank you in advance for your information; we enjoy your column. -- M.S., via email
DEAR M.S.: Reverse mortgages are a good deal for some people and a poor one for others. You didn't give me enough information about your particular circumstances to make an intelligent recommendation. In the absence of that information, I will review some of the key points.
Reverse mortgages allow senior homeowners to stay in their homes and tap the equity they have carefully built over the years. Instead of making monthly payments to a lender, the homeowner with a reverse mortgage receives payments.
Age is an important variable. While reverse mortgages are available to folks over 62, they are seldom a good deal at that age because you still have a long life expectancy. The longer your life expectancy, the less money a company is going to lend. The reason is obvious: The lender's money will be tied up for many years, and payday for the lender isn't until both husband and wife have passed away.
The lender makes its money from the interest it charges on the mortgage, and the loan is well-secured by the equity in the home. It is unusual for a company to lend much more than 60 percent of the home's value. The money that is lent would be reduced by the amount needed to pay off any mortgages the homeowners currently have.
Heirs would receive less money, perhaps no money, from the home that has been mortgaged. If this is a major factor in your decision-making, so be it. Personally, I think you should make the decision without regard to the heirs.
On balance, if your cash flow is small and your life is seriously altered because of the mortgage payments you currently make, and if you have enough equity in the house to secure a reverse mortgage, I say go for it. Even if you outlive the estimated life expectancy that the reverse mortgage company uses as a lending guideline, you can stay there as long as you wish until you die, as long as the property taxes and insurance payments are made in a timely fashion. For some people, this is a godsend.
One other thing I must point out: The expenses to set up a reverse mortgage can sometimes be more than a traditional mortgage. They are not controlled by the government, and while there's always the possibility of abuse, individual circumstances vary.
When reverse mortgages line up and make sense -- and it sounds like this may be true in your case -- in my view, they can be a welcome relief.
DEAR BRUCE: My husband, Art, and I were huge fans of yours. He passed away five years ago. Many years ago, you had said that you didn't believe in annuities. From that point on and until he passed, my husband wouldn't touch them because of your advice.
I would like to know if you still feel that way or if your advice has changed. I now live in Las Vegas and can't get you on the radio as we did in New Jersey. -- A.B. in Las Vegas
DEAR A.B.: I am happy that you and your husband enjoyed my radio program. We stopped doing the show in March 2010. We are considering doing a podcast in the relatively near future, and I hope that you enjoy that when and if it does come about.
As for the annuities: Many annuities were not good investments. It's not that I didn't believe in annuities, but I pointed out that many had serious deficiencies and were regularly sold to older folks who accrued absolutely no benefits from them. Because annuities were a high-commission product as opposed to other investment vehicles that might be in the salesman's briefcase, they often were sold to people for whom they were totally inappropriate.
On balance, I still feel that way about many annuity offerings. New products are constantly coming into the marketplace, and in some circumstances they are good investments and meet the needs of the investor.
If it sounds like I'm waffling, I am, because this is not like stretch socks, where one size fits all. Many reputable companies offer annuities, but a significant number aim to take advantage of investors. Very clear investigation is required on the part of the potential buyer.
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Send your questions to JWR contributor Bruce Williams by clicking here. (Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.) Interested in buying or selling a house? Let Bruce Williams' "House Smart" be your guide. (Sales of the book help fund JWR).
