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CFP® Pro Tip of the Week - April 27, 2018: Reverse Mortgage
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Reverse Mortgage Pros and Cons
As house prices have increased, many older Americans may be tempted to tap the equity in their homes with a reverse mortgage, which is a loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM).
#266 Kids and Money: How to Have the Talk
Kids and money can be a thorny topic for parents. Luckily, personal finance expert, author and architect of the great MoneyAsYouGrow web site, Beth Kobliner joins us to celebrate Financial Literacy Month. According to research, money habits start to form by age 7, so we need to start talking to kids between the ages of 3 and 5.
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Start by identifying coins and their value and discuss the difference between something that is free, like playing with a friend, and an item that costs money, like an ice cream cone. You should also introduce the concept of work and the idea that you may have to wait for something you want.
You can start paying your child an allowance as early as age 6. Most experts agree that an allowance should not be based on household chores, rather it’s better to choose an amount based on what you already spend on small discretionary items your child likes but doesn’t need — like a toy. Make it clear that the amount you’re giving replaces what you would have been spending on her. You should encourage kids to save 10 percent of their allowance by opening a savings account and explain the concept of earning interest. To reinforce the savings habit, consider a "matching plan" for your child's savings: You put in 25 cents for every dollar she saves.
When it comes to teenagers and young adults, you should have the first of many conversations about debt. Explain why it’s important to avoid using credit card cards to buy things you can't afford to pay for with cash. As kids get to high school, you can start talking about the cost of college and about whether or how much the family plans to contribute towards education.
Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Mark is back in the US and makes another appearance on the show. Here's how to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio
#220 Memorial Day, How to Buy Bonds
The roots of Memorial Day go back to the aftermath of the Civil War. It has since been expanded to honor those who have made the ultimate sacrifice for their country. It’s also an opportunity to consider those veterans who are trying to transition into a civilian life. While working on a story, I stumbled upon a great resource for military personnel who are entering the broader job market: GIJobs.com, so pass it on to someone who might need a break!
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The theme of this week's show is "How to Buy Bonds", because both Chris and Jay have big portfolios, allocated almost exclusively to stocks. Each voiced the same concern: Although they want to buy bonds, they find it hard to do so, just as interest rates are poised to rise. We provide both of them with some ideas to accomplish a more balanced portfolio.
Paul has a fixed annuity that will mature in November, but if he cashes it in, he will be on the hook for a big tax liability. He wonders what options are available to mitigate the tax hit.
Should Gary use the proceeds of his primary home sale to pay off the mortgage on his second home? While it might be great to feel unburdened without a mortgage, he might regret not having access to the money.
The existential question of the week comes from Jessica, who asks, "Is it financial suicide to consider taking 6 to 12 months off of work for both working parents mid-career?" Feel free to weigh on this conversation!
Mark and Caroline are busy juggling priorities. What should they do with an extra $1,000 per month? Pay down debt, save for a house or open a 529 college savings plan?
John asks whether all of the staff at the registered advisory firm with which he works, must be registered individually...the answer: Maybe, but maybe not!
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio
#219 The Real Estate Show
Spring has finally sprung and we are celebrating by giving you an overview of the 2015 housing market. Our two guests, Ilyce Glink and Billy Wright, have advice for buyers and sellers and tips about how to navigate the process without losing your mind!
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Ilyce is an award-winning, nationally syndicated columnist, television guest and radio talk show host - you can check out her great information on her website, ThinkGlink.
After providing an overview of the current market, Ilyce also reminded us that the government's HARP and HAMP plans to help struggling homeowners were both extended. Ilyce has great tips for buyers and sellers in these three books:
Billy Wright of Par East Mortgage Company in East Hampton, NY says that with interest rates still at low levels, the mortgage market is heating up. Even those with once-shaky credit are able to borrow again, though it still remains tough for small business owners.
Howard asked about whether he should use reverse mortgage and Ron needed clarification about emergency reserve funds.
Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio
New Reverse Mortgages Rules
The Great Recession and stock market rout eviscerated retirement nest eggs, changing the course of retirement planning for millions of people. And while the value of real estate also plunged, many older Americans owned their homes outright, allowing them to utilize a reverse mortgage to help finance retirement. A reverse mortgage is a loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM).
A reverse mortgagor must keep paying real estate taxes, utilities and hazard and flood insurance premiums. The amount you can borrow depends on several factors, including the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are and the lower the interest rate, the more you can borrow. In essence, a reverse mortgage can help retirees convert an illiquid asset — a house — into a liquid one that can help supplement retirement income.
According to the National Reverse Mortgage Lenders Association, since 1990, just over 900,000 people have tapped their home equity through a reverse mortgage. Because of the sharp decrease in the housing market, the number of seniors applying for these loans dropped by more than half last year (51,642) from 2009 and those numbers could drop even more with the announcement of new reverse mortgage application rules.
As of April 27th, the federal government has decided to make applying for a reverse mortgage more like the process for qualifying for a traditional mortgage. Prior to the change, reverse mortgages did not require lengthy underwriting process, but new borrowers will have to complete “financial assessment” tests.
Would-be borrowers must now prove that they paid their real estate taxes, homeowner association fees and other property-related charges on time for at least the past 24 months. Additionally, they will have to produce documentation, like tax returns, paystubs (if they are still working), bank statements and details of financial assets. Finally, reverse mortgagees will undergo a “residual income” analysis that examines their monthly expenses and cash flow.
If potential borrowers fall short, they may be required to fund a “life expectancy set-aside,” which would funnel a portion of the loan proceeds into a separate account and would ensure funding is available for future tax and insurance obligations. This is akin to escrow accounts on conventional mortgages, which are established to pay property taxes and homeowners insurance.
The set-aside amount is based on a number of variables, including: the total of current property taxes plus hazard and flood insurance premiums; the likely increase in tax and insurance costs; the expected average mortgage interest rate; and the life expectancy of the youngest borrower (the younger the borrowers, the higher the potential set-aside amount).
Critics say the new rules that will make it more difficult for consumers with low income or poor credit records to obtain reverse mortgages. But that’s just the point, according to regulators, who want to prevent defaults by extending reverse mortgages only to qualified borrowers. They note that borrowers with shaky financial situations may be better off selling their homes and using the equity to purchase another home or rent.
The new rules do not address the cost of reverse mortgages, but you should be aware fees can run 2 - 3 percent of the loan amount. It’s also important to remember that reverse mortgage payouts also can impact a borrower’s eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
Fans of reverse mortgages note that the new rules preserve the ultimate benefit of the transaction: Borrowers can still receive a monthly check for life or get a line of credit insured to grow for as long as they live in the home. If you are serious about a reverse mortgage, consult a registered investment adviser or an attorney, who can help determine if it is in your best interest.
#180 Long Term Care, Financial Advisors
Long term care (LTC) is a vexing issue, as both the cost of care and insurance are expected to rise substantially in the future. Who needs LTC and how can you protect yourself? Tune in to find out!
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According to the 2014 Medicare & You, National Medicare Handbook, at least 70 percent of people over 65 will need long term care services and support at some point in their lifetime.
Unfortunately, many do not realize that Medicare and most health insurance plans, including Medicare Supplement Insurance (Medigap) policies, don’t pay for this type of care, sometimes called “custodial care.” We focused on LTC after caller Leslie asked about self-insurance and then followed up with a number of e-mail questions (thanks to all of the wonderful Newsday readers who wrote in). For more info about the topic, check out "Long Term Care Update: Is 90 the new 70?"
For Regina, Ross and Pete, and everyone else who is thinking about engaging a financial advisor, here are some resources to help:
Thanks to everyone who participated and to Mark, the BEST producer in the world. Check out Mark's first-producing credit for this CBS Evening News segment that aired recently. If you have a financial question, there are lots of ways to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio
#179 Relief from the News Cycle
There's just so much awful news around the world lately...take a break and join us for a few laughs and of course, some great financial advice!
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Thanks to everyone who participated and to Mark, the BEST producer in the world. Check out Mark's first-producing credit for this CBS Evening News segment that aired recently. If you have a financial question, there are lots of ways to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio
#178 Retirement Planning for 30-Somethings
"Summer afternoon—summer afternoon; to me those have always been the two most beautiful words in the English language.” - Henry James. It's the first show of August and we're ready to answer your financial questions!
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The first hour of the show was devoted to 30-Somethings Melanie and Tony. As you will hear, the calls start with retirement planning, but we soon expand into other important planning topics.
Later in the show, we discuss annuities for Tim, how to determine your retirement number with Magarito (check out NBER's Choose to Save tool) and how to add bond to your portfolio with Sandra.
Thanks to everyone who participated and to Mark, the BEST producer in the world. Check out Mark's first-producing credit for this CBS Evening News segment that aired recently. If you have a financial question, there are lots of ways to contact us:
- Call 855-411-JILL and we'll schedule time to get you on the show LIVE
- Send an email: askjill@jillonmoney.com
- Tweet us: @jillonmoney and @MTalercio