First Steps for the Newly Divorced

The best way to plan for life after divorce is to do so before your divorce. If you're not yet divorced, contact a qualified independent advisor (yesterday) to ensure that your settlement is equitable.

If your marriage recently ended, know that your financial life will soon change dramatically. (If you've been divorced for a while you already know this.)

The most obvious, immediate, and significant example of this change is that you will likely have less money to spend; this is because your old household income will now support two households rather than just one. The cumultative total of rent/mortgage, furniture, utilities, etc., could be as much as double.

But with a healthy mix of compromise, planning, and sound advice, the changes might even be for the better.

A few pointers to get you started:

• Always keep detailed records of all financial transactions involving your ex-spouse. This includes everything before, during, and after the divorce proceedings; as well as alimony and child-support payments, whether you're making or receiving them.
• Also with regard to support payments, be sure to look ahead and plan for any changes in these payments (for example, after your kids graduate). If you need to get training to support yourself in the future, the time to start is now, not then. Alternately, if you're thinking about starting a business to support yourself, you might consider learning the ropes now, while you have an income, rather than later, when you won't.
• Protect or build your credit rating. Ensure that all joint bank accounts, credit accounts, charge accounts, etc., are closed. Decide which ones are necessary and reapply in your own name. Pay in full every month.
• Prepare a budget for yourself. Be sure to anticipate not only recurring daily, weekly, and monthly expenses, but also those that occur every few months or every year. Base this on your needs, not your wants.
• Prepare a list of financial goals: College for the kids, retirement, a vacation home. Start saving regularly for each, even if only a few dollars a month.
• Perhaps in the settlement you ended up with the house. Typically, the motivation for this is emotional or sentimental: A beloved home has value beyond the financial, after all. But keep in mind that this emotional decision might not make a lot of financial sense: The home's cash value is tied up in the property, which is not very helpful when you've got bills to pay. Further you must pay for the maintenance, repairs, taxes and insurance by yourself. 
• If you do decide to sell, be sure to consider the impact of capital-gains taxes:
  • If you have lived in the house for longer than 2 out of 5 consecutive years, you can deduct $250,000 of long term capital gains (the $500,000 deduction is for couples.)
  • If you have lived in the house less than 2 out 5 years, you may still qualify for a prorated deduction.

Financial Sources has a team and a wider network that can help you through this difficult time. We can help you answer the big questions, like:

• Should I keep the house?
• Will I have enough money to send my children to college?
• Will I have enough money to retire?
• What lifestyle will I be able to afford?
• How much will it cost to learn marketable skills?

Contact us today to get started.

This article is also available as part of the Spring 2012 New Retirement newsletter, available here as a PDF.

More Do’s and Don’ts for 2012

Your local library is a good alternative to your local bookstore, especially if you're a frequent reader.

By popular demand, here are some more tips and tricks to help you spend smart and save this year!

Food

Find out if your grocery store or supermarket offers a discount card. If so, use it-- and buy store-brand or generic items whenever possible.

Join a wholesale buying club like BJ’s, Costco, or Sam’s Club. There’s a membership fee for each, but by planning your shopping carefully that fee can pay for itself in just a few visits.

Eat out less. Try cutting your frequency in half... and then half again. When you do eat out, use the coupons that you’ll always find in the local newspapers or that are mailed to your home every few weeks.

Learn to cook. If you already have, learn more. For less than the price of one average dinner out, you can buy a cookbook that will provide dozens if not hundreds of delicious, nutritious meals.

Plan your menus in advance. This will help you to create a targeted shopping list, which will prevent impulse purchases immediately and reduce waste in the long run.

If you’re frequently short on time in the evenings, cook in bulk and freeze meal-sized portions. Do this, and having a home-cooked meal will be as easy as defrosting.

Don’t food-shop hungry. Don’t food-shop without a list. Do food-shop in a hurry. There are few shopping experiences more prone to impulse purchases than food shopping. If you’re hungry, you’ll buy more food than you need. If you don’t have a list, you’ll also buy items you may already have in the pantry or fridge. The more time you allow for a food-shopping trip, the more unnecessary things you’re likely to buy; keep it brief by squeezing it in between other appointments and obligations.

Buy in bulk. In addition to the frequent deals you’ll find at warehouse clubs, supermarkets and other outlets frequently run specials on things like pasta, cereal, toilet paper, and canned goods. Assuming you have the storage space at home, stock up while you can.

Grow a garden. Eat less meat. Give up (or cut back on) junk food.

Pack your kids’ school lunches. Pack your own while you’re at it. Brown-bagging will save you hundreds if not thousands per year. Also, skip the premium coffee vendors like Starbuck’s. Drink the free company stuff, or bring your own in a thermos. Of, if your company allows it, keep a coffee-maker at your desk. Depending on the degree of your caffeine habit and the type of coffeemaker, it could pay for itself in a week!

Bottle your own water. If needed, invest in a tap- or carafe-type water filter to better ensure purity and tastiness.

Auto

Walk or bike whenever possible. Not only will you save on gas, your car will last longer, and you’ll be healthier, too.  Of course, you may need your car for some trips, but don’t fall into the habit of taking it everywhere.

You can’t be picky about price when you’re running on fumes, so don’t put off buying gasoline until you’re desperate. Pull in for a fill-up when you’re down to a quarter tank. Use a resource like gasbuddy.com to search for the lowest prices on gas.

Don’t use high octane gas, unless your car’s manufacturer specifically requires it.

Do regular scheduled maintenance on your vehicles, including oil changes, rotating your tires, and maintaining proper air pressure in the tires.

Telephone

Reduce your long-distance charges. Use Skype, Vonage, or a similar internet-based service. Or check with your cable provider to find out if low-cost phone service is available.

Reduce your landline charges. While you may want to think twice before cancelling your landline service outright (911 services can’t always get your location from cell and internet phones), review your monthly bill and decide whether you really need all the extra services (such as three-way calling) that you may be paying for.

Reduce your mobile/cell charges. Stay up to date on your provider’s latest offerings. If you’re no longer under contract, stay up to date on what the competition is offering. Even if you are on a contract, calculate what you’d save by switching. It may actually be worth it to pay the early-termination fee.

Don't call 411. Look the number up on the Internet, or in the phone book.

Clothing

Be strategic. For example, shop for coats in the summer and swimsuits in the winter.

Consignment shops are an often-overlooked goldmine. Their inventory is often retail quality (you’ll even find items with the original tags still on).

Wash clothes in cold water.  This will keep colors brighter.

Weather permitting, line-dry your clothes. Not only will this lengthen the life of your clothing, it’ll save a huge amount of energy over machine-drying. It will also give them a fresh smell.

Dress your kids in hand-me-downs. The younger they are, the less they’ll care—or even notice!

Mend clothing, instead of tossing it.

For items that you’ll use only once or infrequently (such as a formal dress, tuxedo, or ski outfit), borrow or rent rather than buy.

Carry a stain-treatment pen, such as Tide-to-Go. Treating stains right away is a good way to prevent the complete loss of an item of clothing.

Home

Insulate your attic.  By some estimates, only one in five older homes in the U.S. homes are adequately insulated. If yours was built more than 30 years ago, chances are you’re wasting money.

Set your thermostat lower in the winter and higher in the summer. Better yet, use a programmable thermostat, so you never forget to adjust the temperature.

Best of all, hire a certified home-energy expert to give your home an energy audit. Should you replace windows? Caulk cracks? Reinsulate the attic? A professional audit will take out a lot of the guesswork, and will very likely pay for itself. See www.resnet.us/trade/find-raters-auditors to find one in your area.

Kill the vampires: Electrical “vampires” are items that continue to use electricity even after you’ve turned them off; for example, big-screen TVs are a major culprit.  The best thing to do is to unplug them altogether. The best way to do this is to run them from a plugboard, which will allow you to disconnect a half-dozen or more at the flip of a switch.

If your electric company offers them, enroll in load-management programs and off-hour rate programs.

When shopping for new appliances, look for the yellow Energy Guide label— and give special attention to those that have earned the government’s ENERGY STAR, which can save up to 50% in energy use. Consumer Reports magazine is also a good resource for this type of information.

Recycle and Compost. Not only will composting your food waste benefit your garden, you’ll be amazed how much of your trash is currently comprised of these two categories. Eliminate them, and you may be able to downgrade your trash service and save some money.

Haul your own trash to the dump, if you have a pickup truck or trailer.

Challenge your property tax assessment, if you feel it’s too high.

Entertainment

Switch to basic cable or get rid of cable altogether. Netflix is a relatively inexpensive source of movies, and internet sites such as hulu.com offer a huge volume of classic and current broadcast content (what we used to call “TV shows”).

If you simply must have cable, call your provider and ask for a discount. Even though most discounts are for “new customers only,” they’ll often give them to existing customers just for asking. For example, find out if you can bundle your TV, phone, and internet service for one lower monthly cost.

Don’t forget about local entertainment. Most newspapers list dozens of community events. Not only are most free or low-cost, you’ll also be supporting your friends, neighbors, and local businesses and organizations.

Skip the $8 tickets and $10 popcorn and wait for movies to come out on DVD or Netflix.

If you must have that big-screen experience, call the theatre and ask about early-bird specials and matinees.

Take a critical look at your magazine subscriptions. Which ones do you look forward to reading, or notice when an issue is late? Keep those. Cancel the others, because you likely won’t miss them.

Don’t buy books; borrow them. Your local library is probably better-stocked and more up-to-date than you imagine. Plus, now that most libraries are wired and networked, if one branch doesn’t have a particular book, it can probably be found in another.

If you buy books, don’t buy new. Used books are all over the internet. At the very least, peruse the “Used” alternatives at Amazon.com.

Plan vacations ahead of time. This will save on accommodations and airfare right off the bat. It will also help you to avoid the disappointment and expense of driving to an attraction and finding out that it’s closed for the day-- or the season!  Speaking of which, if it fits your plans and expectations, consider vacationing in the offseason to save a bundle.

Take a “staycation” instead of a vacation. As you may have guessed, a staycation is a vacation from work during which you stay at home. Whether you use the time to do some home improvements or just relax is up to you. Either way, sleeping in your own bed will be cheaper than a hotel.

As a wise person once said, “take care of the pennies, and the dollars will take care of themselves.” At Financial Sources, we know that your pennies and dollars are all part of your overall financial health. Give us a call; we’re happy to discuss either!

This article is also available as part of the Spring 2012 New Retirement newsletter, available here as a PDF.

Retired, Rehired

The rules are different for over-55 job hunters.

You're looking for work.

Whether it's because you’re saving for your future retirement, or you didn’t save enough for your current retirement, or you just want to stay active and stimulated; whether you’re interested in full-time or part-time work; the most important thing to remember is the one constant in any job search.

Just about every employer is looking for an employee who is tuned-in to the company’s needs and values, and who can make a persuasive case for what he or she has to offer. In this light, your age and experience can easily put you ahead.

Of course, the first question is “what kind of a job are you looking for?” If you’re looking for something new or you feel like there isn’t enough opportunity in your former field, you might think about what your experience outside of the workplace qualifies you for.

For example, if you’ve raised a family and babysat grandchildren, you could be suited to a position in childcare— or other fields involving interpersonal skills, such as customer service. If you’ve managed finances for your household, church, or other organization, you might be able to refine that experience into a valuable skill set for office management or accounting. Or, if you’re good at projects around the house, you might find work as a handyman.

Still, it’s sensible to consider that most jobs these days involve some use of computers, so you’d best be sure your skills in that area are up to date. Even if you were in command of the technologies of your field in your last job, these are constantly evolving, and it often seems like this is happening faster and faster.

A good way to stay on top of the market is to take a class at your community college. If you don’t have them already, learn basic computing skills, such as Microsoft Office and HTML (the language that’s used to create web pages). After you do this, be sure to mention it in your written and spoken contacts with interviewers and other human resources representatives: It will show your willingness to build upon your years of experience with current technology skills. It’s a winning combination, and will give you a stronger chance of being hired.

Of course, it’s been a long time since “technology and computer skills” meant just green-screen terminals or even Excel spreadsheets. These days, familiarity with social networking sites such as Facebook and Twitter is expected. As a matter of fact, these sites can even be used effectively in your job search. Some surveys tell us that as many as four out of five employers are using social networking to fill open positions; the problem is that only 6% of active job seekers age 55+ are making themselves available on these sites. (For younger cohorts, the social-networking users comprise more like 15-30%.)

It’s said that the ancient Chinese curse would curse someone by wishing that they “live in interesting times.” For job-seekers 55 and older, these are certainly interesting times. But the right preparation can turn that curse into a blessing. Give us a call to learn how we can help.

Download the Winter 2012 issue of the New Retirement, where this article appears.

Do’s and Don’ts for 2012

Resolve to follow these simple tips and save more of your hard-earned money in the new year!

Money Management

DO shop off-season. You’ll get the best deals on summer items during the winter, and vice-versa. Planning ahead— especially for major purchases— can save you a bundle.

DO make a budget. And use it! The best way to start? Write down every expense for a month to see where your money’s going.

DON’T make unbudgeted purchases without asking yourself: Do I need this? If I need it, do I need to buy it, or can I rent or borrow instead? If not, can I get it used? If not, wait 48 hours: Oftentimes, the urge to spend disappears.

DON’T be late paying your bills. There are so many ways to pay these days, that there’s hardly an excuse for paying a late fee, which can often be as high as $40. You can set up automatic payments with your bank’s online banking; or you can allow your vendors (the electric company, the phone company) to automatically debit your bank account or charge your credit card.

DO, the first time you’re late paying a company, call and politely request that the late fees be waived. They’ll often be understanding, as long as you’re not a repeat offender.

Banking

DO always be aware of your checking balance, especially if you’re automating your payments. Check in at least once a week.

DO watch for fees. Banks are seeking new ways to make money from their customers, and some experts are predicting the imminent end of free checking. ATM fees are a common danger zone: Transactions with your own bank’s ATMs are usually free, but you’re likely to be slammed if you use another bank’s ATM. In addition, banks are getting creative in coming up with whole new fee categories— for example, fees for paper statements, excessive transactions, and check imaging!— and becoming more punitive about late fees and overdraft charges.

DO consider switching to a credit union instead. The fees are lower, they don’t punish small balances, and they’re smaller targets for identity thieves. Find one at the National Credit Union Administration’s website: www.NCUA.gov.

DO use online resources such as bankrate.com to find the best rates on savings accounts, money markets, and CDs.

Credit-Card Debt

DO pay off your credit-card bill every month. If you can’t, then at least pay as much as you can. Regardless, be sure to submit your payment well before the due date, to avoid late fees.

DO consolidate and refinance your credit-card debt if you can’t pay it off soon. At the time of this writing, credit card companies are still eagerly hawking 0% balance transfers. Just be sure to check the small print, especially regarding the length of the low/no interest promotional period, the regular rate after the promotional period, and transfer fees.

DON’T pay an annual fee. There are many free alternatives out there, and the cards that offer rebates, cash back, travel awards, or other perks are often the most expensive.

Insurance

DON’T listen to insurance commercials that talk about “protecting” you. Insurance is a way to pay for misfortune, not avoid it. With that in mind, ask yourself who should pay for the relatively small stuff— $1,000 or so. If you can come up with that kind of money quickly, then there’s no point in paying an insurance company to do it. Raise your deductible and you’ll slash your premiums.

DON’T insure your old car like it’s new. Regardless of what you’re paying in premiums, your insurance company will only reimburse up to the “cash value” of the car. Stay on top of the Kelley Blue Book or Edmunds value of your car and be sure to drop any coverage you don’t need.

DON’T assume that you’re getting a good deal from your insurance company, even if you’re generally happy with them. Ways that they can make you even happier include:

• Lowering your rates based on new circumstances, such as a shorter commute, a new alarm system, or “safe driver” status.
• Giving you a multi-policy discount for bringing your auto, homeowners, and other insurance under one roof.

DO review all your insurance policies once a year, to make sure they still cover what you think they do. Worse than paying a little too much every year is paying way too much, to recover from misfortune because you were underinsured.

DON’T cancel an old policy without being absolutely sure that the new one is in effect.

Healthcare

DON’T continue unhealthy habits, like smoking. (Money is only the first thing you’ll save!)

DO practice healthy habits, like exercising.

DO ask for discounts if you’re paying cash— yes, even doctors and hospitals will sometimes haggle!

DON’T pay for name-brand medications if there’s a generic or OTC (over-the-counter) equivalent available.

DO find out if your medications are available through retailers (Walmart, for example), who offer staggering discounts on certain generics, as low as $10 for a 90-day supply.

As a wise person once said, “take care of the pennies, and the dollars will take care of themselves.” At Financial Sources, we know that your pennies and dollars are all part of your overall financial health. Give us a call; we’re happy to discuss either!

Download the Winter 2012 issue of the New Retirement, where this article appears.

Happy Holidays from FSI!

Good food, good entertainment, and good friends! The Meadows in Hellertown provided us with the perfect setting for this year’s Holiday Party.

Magician Joe Keppel of Keppel’s Magical Readings Programs kept all of the 187 clients and guests in attendance scratching their heads in disbelief at his amazing sleight-of-hand.

The extraordinary 18-piece band and singer of the Red Hill Band’s Jazz Band kept the room filled with sonorous holiday and big-band-style music; our guests graced the dancefloor all night.

If you missed this year’s party, never fear…we will have one again next year!

From all of us at Financial Sources, Inc., a very safe, blessed, and wonderful holiday season.

Financial Security the Regular Way

Everyone knows that the secret to investing success is simple: Buy low and sell high. The difficulty, of course, is knowing what’s high and what’s low.

Attempting to get into the market just before it rises or getting out just before it falls is called market timing, and in our experience there’s no  surer way to lose money and sleep at the same time. And perhaps the worst example of market timing is what’s called day trading. This involves buying investments—usually stocks—and then reselling them after a relatively short time, sometimes only hours or minutes. The theory is that if you do this often enough, the small profits you may make on each trade will accumulate into a large amount overall. The flaw in this plan is typically twofold:

First, as Warren Buffett once said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” He meant that, when viewed too narrowly, markets reflect emotion rather than reason. And, while irrational exuberance can be fast-moving, it’s no match for the speed of a desperate herd fleeing for safety: Losses often appear much more abruptly than gains, so it’s arguably harder to succeed within small timeframes than large.

Second, each trade usually involves a transaction fee, which comes out of your pocket, whether you win or lose. In short, day trading is not a strategy we recommend.

What we do recommend is its opposite, regular investing, which encompasses both of the great ideas discussed elsewhere in this issue: Compounding and risk management. The basic idea is that you decide on a fixed amount to invest at regular intervals (weekly, monthly, etc.), set the account to reinvest any gains, and then put it out of your mind. Over time, compounding will work its magic, enabling your earned money to earn even more, and so on, and so on. Meanwhile, because you have defined your contributions in dollars rather than (say) shares, you will automatically pick up extra shares when the stock is priced low, and avoid buying too many when it’s overpriced.

So, there you have it: One way to buy low. Selling high, however, is another matter. When it comes time to withdraw your funds, especially during retirement, the arithmetic becomes more complex. Lucky for you, Financial Sources has decades of experience in devising strategies for investors just like you. Give us a ring today and we’ll get you started.

Money and Life: Risky Business

The Gut-Test

One of the most important, questions that a financial advisor should ask you is “what is your tolerance for risk?” After that, one of the most important events in any investor’s life is the first time the market challenges your response, when it swoons (or tanks) after you’ve placed some money in it. Many of us who had considered our stomach for risk to be moderate or high, learn in a flash what our real tolerance is, when we watch thousands of dollars in gains—or, worse yet, savings— evaporate before our eyes.

But risk comes in more than just one flavor. In addition to the risk that your portfolio is too risky—and subject to the vagaries of the market—there’s also the risk that your investment profile is too conservative. For example, an investor who had her money entirely in cash would have emerged from the crash of 2008 relatively unscathed. But maintaining that profile during the ensuing years would mean that she’d have missed out on as much as 93% of gains in the Dow, 100% in the S&P, and a whopping 222% in the Nasdaq.*

As a wise person once put it: If you’re lucky enough to have two nickels to rub together, keep them in different pockets. This is the essence of what we call “asset allocation.” By balancing riskier investments like stocks with safer investments like cash, an investor can set a relatively smooth course between the dizzy heights and crushing lows of the market.

Unsure? Insure.

In addition to the hazards of investing—some unpredictable, others only a matter of time—life itself has risks that the savvy among us know to prepare for. How is this done? In a word: Insurance.

An ironic characteristic of insurance is that its cost rises with the likelihood that one will need it. For example, one of the least expensive forms of insurance, dollar for dollar, is homeowners insurance: A few hundred dollars a year will get you hundreds of thousands of dollars, should you ever need to replace your home. At the other end of the spectrum, there’s medical insurance, which costs the average American family more than $10,000 per year. The difference? Only a small percentage of homes are destroyed in a typical year. But just about every family avails of some amount of medical care, every year.

Perhaps the toughest decision to make with regard to insurance is which types are essential and which types you might realistically go without. For example, we’ve always encouraged our clients to consider life insurance instead as “income insurance.” That is to say, if no one is relying on your income—because you are childless and unmarried, or retired, or widowed—you might safely save yourself the cost of those premiums unless your status changes. Of course, all circumstances are unique, so we strongly suggest you contact us rather than taking this as direct personal advice.

* Source: Respective indices, March 6, 2009 vs. April 29, 2011.

The Most Powerful Force in the Universe

It’s a popular brainteaser in kids’ books and magazines:

Which would you rather have: $1 million right now, or a penny that doubles every day for a month?

Maybe you won’t be surprised to hear that most kids pick the wrong answer. Maybe you WILL be surprised to hear that most adults do, too.

If you opted for the cool million on the barrelhead, you just left $342,177 on the table. In fact, that’s what you’d have lost if the month in question was a non-leap-year February. After a 30-day month, you’d be down by $3,368,709. In January, March, May, July, August, October, or December, your bad decision would have cost you a whopping $9,737,418!

This leads to two natural questions:

1. How could a single penny grow in a single month to more than the salary of most of the Phillies?
2. How could three extra days earn an additional $9 million?

The answer to the first question is simple: Compounding. Compounding is the practice of adding gains—i.e., returns or interest—back into your principal. Our example used doubling, which naturally is well above the kinds of return that anyone could expect from a legitimate investment. But the effect of compounding of any kind is so extraordinary that even Albert Einstein is reported to have called it “the most powerful force in the universe.”

Perhaps even more interesting—and relevant to any investor—is our second question. How could three days make such a difference in our final results? It all depends on which three days. For example, in the first three days, the penny grows to eight cents. While that’s eight times the original value, it’s still only seven cents’ profit, because the principal is still so small.

But by day 28, the principal has grown to $1,342,177. So ANY multiplying—much less doubling—is going to have some impressive results. It reminds us of what Sam Walton, the founder of Wal-Mart, once said: “a small percentage of a really big number is still a big number.”

So, what else do you need to know in order to fully harness the awesome power of compounding? Compounding’s greatest enemy: Procrastination.

Back to our example: If you waited until halfway through the month (the 15th) to start your doubling, perhaps you think that would cut your results in half? Think again. Even at the end of the longest month, your take would be only $655.36. (No, we didn’t misplace the decimal.)

The lesson is clear: The longer you delay starting, the less likely your principal will be large enough to grow rapidly when you need it to.

Need help (or coaxing) getting started? Contact the FSI team, and maybe we’ll begin by discussing the Chinese proverb: “The best time to plant a shade tree is 20 years ago. The second-best time is now.”

Reversal of Fortune? (Part 1 of 3)

Before Applying for a Reverse Mortgage, Learn the Facts!

If you are retired or nearing retirement, you may be looking for a way to supplement your income, pay for healthcare expenses, or make necessary home improvements.  Historically, this has meant either selling your comfortable, cherished home or taking out a home equity loan and facing years of monthly payments. However, since 1989, homeowners have had another alternative:  the reverse mortgage.

What Is a Reverse Mortgage?

A reverse mortgage is a special type of loan that (if you are 62 or more) allows you to borrow against the equity built up in your home, while retaining title. The most basic difference between this and a standard mortgage? In a standard mortgage, you make payments to the lender; in a reverse mortgage, you receive payments from the lender.

Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). Like regular mortgages, they are widely available through traditional lenders.  They involve no income or medical requirements, and the funds can be used for any purpose.

How much you can borrow depends on several factors, including:

• Your age,
• The type of reverse mortgage you select,
• The appraised value of your home, and
• Current interest rates.

In general, the more equity you have in your home— and the less you owe on the existing loan(s)— the more money you can get out of it.

You can choose among several payment options:

• Term Option: Fixed monthly payments for a specific time.
• Tenure Option: Fixed monthly payments for as long as you live in your home.
• Line of Credit: Draw down the loan proceeds at any time and in any amount until you have used up the line of credit.
• A combination of monthly payments and a line of credit.
• Lump sum (which is sometimes used to buy annuities or similar income-generating vehicles. 

There are some conditions: Before applying for a HECM, you must meet with an independent government-approved housing counselor (for a fee of around $125, which is usually rolled into the loan). The counselor is required to explain the loan’s costs and its financial implications for your situation, as well as possible alternatives. He or she should be able to help you compare the costs of different types of reverse mortgages and tell you how the various fees, payment options, and other costs will affect the total cost of your loan for its duration.

Additionally:

• You must also own your home entirely or be able to pay off your home loan with the proceeds from a reverse mortgage;
• You must live in your home; and
• Your home must meet certain criteria according to HUD. Qualifying homes include most single-family homes, as well as some condominiums, manufactured homes, and multi-unit structures that meet FHA requirements.

The loan becomes payable if:

• Your home is sold, usually because of death or relocation. In this event, you or your estate must repay the lender any cash you received from the reverse mortgage, plus interest and other fees (any remaining equity in the home is yours);
• You default on the loan, by not paying your property taxes or homeowner’s insurance; or
• The property conditions deteriorate and necessary repairs are not made.

Read Part 2

Reversal of Fortune? (Part 2 of 3)

Other Types of Reverse Mortgages

Proprietary reverse mortgages are private loans, backed by the companies that develop them.  While this is generally the most expensive reverse mortgage in terms of total cost, it may include a bigger advance if you own a higher-valued home. Some lenders offering proprietary reverse mortgages also require advance counseling, and how much you can borrow can also depend on your age, the appraised value of your home, and current interest rates.

Single-purpose reverse mortgages are offered by some state and local government agencies and nonprofit organizations.  These are generally the least expensive option, but they are not as widely available and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, some lenders might restrict the funds to home repairs or improvements.  Others may specify that the loan may only be used for property taxes. However, when available, most homeowners with low or moderate income can qualify for these programs. If you plan to stay in your home for just a short time or borrow a small amount, a single-purpose reverse mortgage might be a good fit.

Is a Reverse Mortgage Right for You?

While the reverse mortgage can be a good option for some people in need of extra cash in retirement, there are many important cautions to consider.

Reverse Mortgages Can Be Costly

At the outset, reverse-mortgage lenders generally charge an origination fee, a mortgage insurance premium, and other closing costs. Some lenders also may charge servicing fees during the term of the mortgage. These costs can vary from lender to lender, even if the origination cost for your loan is dictated by law. 

You’re Spending Your Savings

According to HUD, the average age of borrowers has decreased from 77 to 73 years. While you can apply for a reverse mortgage as early as age 62, that’s not necessarily wise. As in many areas of retirement planning, the danger here is that you’ll outlive your savings, and have no equity to tap should you need long-term care late in life, when you’re most likely to need it. Keep in mind that, while the monthly payments may feel like income, you’re essentially spending down the portion of your life savings that’s accumulated in your home.

Fees Are Substantial

Up-front fees include:

• Mortgage insurance premiums (see below),
• Loan origination fees, and
• Closing costs.

Recurring fees include:

• Mortgage premiums,
• Interest, and
• Servicing fees.

As with standard mortgages, a HECM loan charges an insurance premium up front.  At this writing, it’s 2% of the home value— so, for example, if you own a home valued at $500,000, the insurance premium would be $10,000— whether the loan is for $20,000 or $100,000.

In October 2010, the HECM Saver loan debuted. This variation charges only 0.01% of the home’s value. However, this immediate advantage comes with costs: The HECM Saver usually carries a higher interest rate, and lending limits are both lower than the standard loan and dependent on your age.

Plus, both types of loan require borrowers to pay annual mortgage insurance premiums of 1.25% of the outstanding loan balance.

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