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Jewish World Review April 21, 2004 /31 Nissan, 5764

Jan L. Warner & Jan Collins

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Consumer Reports

A cautionary tale of
quick-fix mortgages | Q: After we lost a large part of our investment portfolio, my husband tried to play "catch up," but took too much risk and lost even more. We were forced to terminate his life insurance, lived month-to-month on our Social Security, and ran up a huge credit card debt. To help us out, my husband tapped into our home's equity because interest rates were so low.

We took out a 10-year, interest-only, adjustable-rate mortgage, borrowing 85 percent of our home equity. We made minimal payments each month but immediately used more than $120,000 to pay our debts, and used much of the rest just to live on. My husband died of a heart attack last year, and the monthly payments have begun to increase. At 67, I'm getting his Social Security ($1,400 monthly) and have only $40,000 of borrowed money in the bank. It's taking a long time to sell our house, and it's unlikely that I will get enough to pay off the mortgage.

While I share in the blame with my husband, I hope you will warn others our age about taking risk and taking out quick-fix mortgages.

A: These types of mortgages are tragically bad choices for those who find themselves with unmanageable payments, homes they cannot sell, or homes that have decreased in value to less than their mortgage balances.

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In contrast to a fixed-rate loan that locks in your rate, an adjustable-rate mortgage (ARM) gives borrowers an initial sense of security when they see that lower interest rate and lower monthly payments — though only for a short while. ARMs offer little protection against future higher interest rates.

As interest rates begin to increase from their record lows, borrowers can expect upward adjustments each year, generally with a cap over the life of the loan that is written into the contract. Oftentimes, "teaser rates" during the first year are followed by rates that are tied to such indexes as Treasury bills plus an added "margin." An ARM, for example, that increases 2 percent per year over four years will play havoc with folks on fixed incomes.

Experts say that the factors you should consider before taking an ARM include 1) your best "guesstimate" of the unpredictable direction of interest rates in the future, and 2) the length of time you plan to stay in your home. Generally, if you are not planning to move within the next five years, you should lock in a fixed-rate loan.

You said you took out an interest-only ARM. While interest-only payments allow folks to buy more expensive homes and defer principal for up to 10 years, the unpaid principal balance will be fully amortized over the remaining 20 years of the loan at unpredictable rates.

Retired seniors who are financially squeezed and baby boomers who are caught between helping parents, educating children, and planning for their own retirements should be realistic about their futures and not try "quick fixes" that will cause greater financial problems down the road.

Borrowing, like investing, should be part of a coordinated plan, not a knee-jerk reaction to a situation. We believe that If you are going to leverage your home equity, you should have sufficient life insurance and long-term care insurance in place, in case what "just can't happen" does.

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JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.


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Poor financial planning leaves Dad cash-strapped
How do I protect my parents from falling?

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Bankrupt seniors now the debt generation
How can we help ease Dad's depression?
Compensating sister for Mom's care; purchasing life insurance policies from terminally ill individuals
My aunt profited from grandpa's weak will; foreclosing against senior is best
Pay employer taxes for caregivers?
Help Mom organize her finances
Where can seniors get the best health info?
How do we stop our mooching daughter?
Can you stop a double-dealing lawyer?; caregiver red flags
How the government bilks seniors
Dad's new wife took the inheritance
Parents' trustee choice a hidden blessing
Finding the money for home care
Elderly mom is sweet on a hunky aide
'Ziva' gets the scoop on nation's nursing homes
Care decisions for 'elder orphans'
Seeking help for dementia victims
Read admission-package 'agreements'; booting a patient once Medicaid kicks in
Can the kids block our cash flow?; childless couple agonizes over whether to use
powers of attorney or a living trust to manage our assets

Control your assets from the grave
Slacker son will blow his fortune; lawyer's role in "estate-planning"
Mom remarried and spent my inheritance; doesn't want daughter-in-law to receive anything from estate
Can we stop our brother from swindling us?
What Gifting Will Disqualify You From Medicaid
The 'magic' language for a power of attorney agreement
Is care insurance a healthy choice?
Is there protection against Medicaid costs?
Long-term care insurance comes up short
HIPAA -- too much privacy?; nursing home doc could care less
Private pay nursing home residents pay more
Separated families should use care managers
What Makes Up a Caregiving Team?
Who is the client, parents or children?:

© 2003, Jan Warner