Reverse-Mortgage-Truth.com

This is the second post in a series.

If you need additional monthly cash flow, and there is any possibility that your funds will last less than a year, then it is time to assess all your options and obtain the money that you will need over the next several years. Which may mean that it is time to obtain a reverse mortgage. You do not want to get caught in a stressful last minute scramble for money and risk not having enough.

If you are going to use the funds that you have, make sure that you first consider the cost as compared to a reverse mortgage. If those funds have been in invested in stocks or a similar investment vehicle, you will probably owe capital gains taxes when you cash them out. The tax laws have become so complicated that you should talk to your tax expert to determine how much in taxes you will owe. Another cost of cashing in your investments is the loss of the future returns on those investments. Remember, the long-term return on stocks is about 11% per year – which, when compounded over time, can add up to a lot of lost money – far more than a reverse mortgage would cost you.

What if you are an heir and those investments belong to a senior parent? Then you need to consider the consequences of using those funds now versus avoiding capital gains taxes by waiting to inherit the funds. How does that work? Generally, when you inherit an asset that has increased in value, you enjoy the benefit of a stepped-up basis in that asset and thus no capital gain. Here’s an example:

Mom bought stock 20 years ago for $1000. $1000 is her basis in that stock. Today, that is worth $10,000. If she were to sell it, she would have a capital gain of $9000. That means she must pay capital gains taxes on $9000. But, when the heir inherits the $10,000 in stock, his basis is $10,000. So assuming he sells it before it appreciates more, he will have $0 in capital gains taxes! You should consult a tax expert to confirm all tax-related issues for your specific circumstances.

Check here to find out what reverse mortgages California cost.

The following are today's reverse mortgage interest rates for the most popular reverse mortgage products:

HECM Reverse Mortgage rate: 3.02% (Index is the CMT at 1.52% plus a margin of 1.5%, adjusts monthly)

HECM Reverse Mortgage fixed rate: 5.55%

Independence Plan 360 jumbo reverse mortgage: 5.96625% (Index is the LIBOR at 2.36625 plus a margin of 3.6%, adjusts every 6 months)

Independence Plan 210 jumbo reverse mortgage: 4.46625% (Index is LIBOR at 2.36625 plus a margin of 2.10%, adjusts every 6 months)

Cash Account Advantage jumbo reverse mortgage: 6.17% (Index is 6 month LIBOR at 2.67% plus margin of 3.5% adjusts every 6 months)

Refinance and Pull Cash Out
Another alternative may be to pull cash out of your home equity with a traditional mortgage. Why not? Perhaps you should. But first make sure that you fully understand what you're getting and the risks, versus a reverse mortgage.

The two traditional home loan options are the Home Equity Line of Credit (HELOC) and Cash-Out Refinance (CO-REFI). These are loans that are probably offered by every bank in town and are often advertised on their windows. The main difference between the CO-REFI provides you with a one-time lump sum of money and the HELOC gives you much less money, but (like a credit card) you can take out money and put it back in whenever you wish. Some people use these home equity loans to help finance their lifestyle.

So what are the problems for people 62 and older with these loans? The first is that you must qualify for both of them. The qualifying criteria, which determine your interest rate and amount of money that you can get, are all of the following: (1) your credit history and rating; (2) monthly income and amount of cash already in your bank accounts; (3) equity in the home. Now compare those qualifying requirements to those for a reverse mortgage: homeowner's age, location and equity in the home. Now that's more like it!

To get a reasonable amount of money from a traditional mortgage you must have a large enough income (or bank account) to make the required payments for the term of the loan - which is 30 years in some cases. This is why you've heard the saying: "banks only loan money to people who don't need it." In most cases (excepting the reverse mortgage), that's true. If you need the money, you may not qualify for very much. And the less money you get, the quicker you'll run out of it as you spend it on loan payments and your other expenses.

Which brings us to the second and potentially bigger problem: if you're getting a traditional mortgage to help cover expenses, you are using loan proceeds to make the payments. That's called borrowing from Peter to pay Paul - or perhaps more accurately, borrowing from Peter to pay Peter!

In the case of a HELOC, as you use up the money from the loan, your payments will increase sharply. With the CO-REFI, you're paying interest on the FULL amount of the mortgage the month after you take out the loan. So what happens, with either forward mortgage, when you use up all the money and can no longer make the payments? You will be forced to sell your home- or the bank will foreclose and take your house. That's a bit of a dangerous downward spiral, don't you think?

Worse yet, most HELOC's (and many CO-REFI's) have adjustable interest rates. Adjustable rate means adjustable payment. As interest rates rise, your monthly loan payments can rise dramatically. Which brings us back to that dangerous downward spiral.

Stay tuned for more on this topic tomorrow!

Ask for Money From Relatives
Another common alternative to the reverse mortgage is to ask your children or other relatives for money. Aside from the obvious loss of financial independence, pride of taking care of oneself and the potential creation of family conflicts, there are, in fact, hard costs to consider.

If your relatives must sell some of their investments, they may owe capital gains tax and will lose the future return on those investments. If they are fortunate to make enough money from their paychecks to support you, they may be diverting money that could otherwise go into THEIR retirement accounts. Not only would they lose the future investment returns, but if their retirement account receives pre-tax money, they are losing an additional 25%-45%, depending on their income tax rate. Now that makes reverse mortgages look very cheap by comparison!

Another alternative to the reverse mortgage that seniors use will be discussed tomorrow.