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Home Sweet Home

Financial Planning

February 2003

Home Sweet Home

There is an insidious malady making it’s rounds throughout this country. If you live long enough, you, your parents and grandparents will suffer from this malady. There’s no way to get around it and it can be deadly. It is…old age!

Ok, you’re right, this “malady” is what we all hope to attain. We plan our whole lives for it and, if we play our cards right, we have sufficient assets to be comfortable in the “golden years” of our lives. In essence, we desire to, “Live long and prosper,” as Mr. Spock says, but what if our loved ones or we don’t prosper? Consider the following scenario:

Your mom and dad work hard all their lives, build a life for you and your siblings and, when the time comes they retire. Unfortunately, they were unable to save a great deal for retirement because of the financial demands of raising a family. All they have is a small pension and Social Security. It’s not much, but they make due and are comfortable. Then your father dies and the amount of pension decreases, or disappears entirely due to improper elections being made at retirement, and the amount of Social Security also decreases.

Thank heaven that the house is fully paid for. At least Mom has a place to live. Then, the roof springs a leak that turns into a gaping hole because Mom couldn’t fix it. You and your siblings are raising a family and can’t help much either.

What do you do? Mom can’t borrow the money because she won’t be able to make the payment. She’s too frail to start a new job. Is Mom just plain out of luck?

This is not an atypical set of circumstances for our senior citizens every day. Fortunately, if they have equity in their home, there is an answer – a reverse mortgage.

A reverse mortgage is one where you borrow funds from the lender and do not pay the loan back. Instead, interest is charged on the loans until the borrower either sells the property or dies and the heirs sell the property.

Does this sound risky? Not really, because the note covering the mortgage specifically states that the amount due can never exceed the market value of the property. Assuming the need is present, these mortgages can be quite attractive. Let’s take a look at how they work.

First, you determine the type of mortgage you want. Do you need money for a specific purpose? Are you simply looking for a way to enhance your cash flow? You need to know the answers because there are various type loans.

There are three basic types of loans – FHA insured, single-purpose and proprietary. They have varying features and can differ significantly in cost.

The single-purpose mortgage is one taken out to pay for home repairs or property taxes. They are generally made and administered by states and local housing authorities. Because single-purpose loans are generally made by state and local governments, single-purpose loans are not available everywhere. Further, most loans are available only to low-income borrowers over 62 years-old. Restrictions on these type loans generally mean they provide less total cash over their contract period.

FHA insured loans are also called Home Equity Conversion Mortgages (HECMs). These loans generally are not limited as to purpose and provide cash advances over a specified period of time. They are available throughout the United States to borrowers 62 years old or over and there is no income requirement. They are generally more expensive than the single-purpose loans, but much more flexible and less expensive than proprietary loans.

Proprietary reverse mortgages are generally offered only by banks and other private lenders. These mortgages can be used for anything and are available to borrowers 62 years-old and over. They are the most likely to provide you the highest cash payout if your home is more valuable than other homes in your area. Otherwise, these loans produce less cash than HECMs.

For more information on reverse mortgages, check out the AARP website or the Federal Trade Commission website. Both have excellent information on the details of these mortgages.

In these uncertain times, you can take nothing for granted where your finances are concerned. However, you shouldn’t assume there is absolutely nothing you or a loved one can do to cash in on illiquid assets like homes and other properties. If you or a loved one is in a cash bind, there are options. If you need help in determining the proper loan for you or your loved ones, give us a call. We are, after all, here to help.

Have a great February!

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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