as to how much you can borrow, and the amount often
Grow
Tax Benefits
Your
There are tax benefits to investing this money as well.
is not as much as the borrower needs. Second, closing
Assume you have a 6% mortgage and earn the same
costs, fees and interest rates for reverse mortgages are
very high – if you die or move out of the house within
Nest Egg
amount on your investments. Is it a wash? No, thanks
to current tax law: The money you spend in mortgage
a couple of years, you’ll wish you didn’t obtain that
By Ric Edelman interest is deductible at your top tax bracket, but the
type of loan.
profits you earn on your investments are taxed as low a
Before You Retire, Get a Mortgage
I’m not alone in my concerns about reverse mortgages.
15%. If you’re in the 25% tax bracket, this means your
The Financial Industry Regulatory Authority has is-
The goal of retirement is to live in financial security. But that has noth-
mortgage costs 4.5% after taxes, while your investment
sued a warning, urging seniors to carefully weight all
ing to do with being debt-free. In fact, a big, long mortgage will work
nets you 5.1% after taxes. In other words, tax law helps
their options before obtaining a reverse mortgage.
in your favor in retirement. Think I’m nuts? Well, I’m not. What’s really
make it beneficial for you to have a mortgage.
FINRA says reverse mortgages are being aggressively
crazy is tying up hundreds of thousands of dollars in the walls of your
marketed as an easy, cost-free way for retirees to
house where that money can’t serve you at all.
Of course, this strategy isn’t suitable for everyone. If
you don’t have the discipline not to fritter away the
finance lifestyles or to pay for risky investments when
Fix Your Income
$100,000 on a new television, vacations and other non-
these mortgages can actually jeopardize your financial
The truth is, the older you are, the more important it is that you don’t
essentials, you shouldn’t get a new mortgage. The same
future and therefore “should generally be a last resort”
have a lot of equity in your home. Think about it: When you retire, you
is true if a mortgage payment is going to keep you
for those in need of extra cash.
are on a fixed income. You aren’t earning a salary anymore, and health
awake at night.
Counterintuitive and Smart
care or long-term care costs are more likely to pop up when you least
expect them. Even if you and your spouse are able to avoid medical
House-Rich,
In other words, if you think you’ll need to get the
expenses, you’ll want funds to travel, make home repairs, support a
Cash-Poor Senior Savior
equity out of your house in the future, do it now via
a conventional mortgage rather than later through a
charity or help send your grandkids to college.
Over the years, I’ve encountered many people who
reverse mortgage. While the idea of a mortgage during
would have benefited from holding a mortgage
Workers who suddenly need cash – to repair a roof, say, or buy a new retirement is counterintuitive (and opposed by many
during retirement. Recently, I took a call on my
car – could obtain a home equity loan or line of credit to cover that self-proclaimed gurus who don’t understand the
radio show from a man whose 85-year-old mother
expense. But retirees usually don’t have that ability because lenders benefits of mortgages), it’s actually a very smart strat-
was suffering from dementia. His sister was staying
require an income stream that retirees usually don’t have. egy. Remember that you’ll always be happy that you
with Mom 24/7 for the past two years, fulfilling Mom’s
have ready access to money when those unexpected
You can avoid this kind of problem by obtaining that mortgage loan before you retire (while you still have an
wish to stay in her own home until she dies. Although
expenses come up.
income stream). For instance, say you were to get a new mortgage, taking $100,000 out of your house’s equity.
the family wanted to hire full-time care for Mom, her
That would give you a monthly payment of about $700. The notion of getting the use of a hundred grand is
only asset was her $700,000 house, which she owned Because despite your best planning, something will
enticing, but how will you pay for that $700 monthly bill? From the $100,000 you borrowed, that’s how! After
free and clear. come up. It always does.
making your first payment, you’ll have $99,300 left. See the point? Even if you earn no interest at all, you’re able
Now, $700,000 can buy a whole lot of homecare. But Author: Ric Edelman is founder and chairmen of Edel-
to make payments for years and years – and all the while, that money is ready and available to you in case you
not if you can’t access it – and she couldn’t because she man Financial, which manages $4 billion in assets for
ever need it.
didn’t have a mortgage. Selling the house wasn’t an op- individuals and families nationwide. He is the author
And, of course, until you do need it, that money can be invested where it can grow. If you’re able to leave the mort-
tion because Mom didn’t want to move. of six books, including the current best seller “The Lies
gage proceeds untouched and invest it for an 8% annual return, your $100,000 account would be worth nearly a About Money,” and host of The Ric Edelman Show,
This problem is so common that an entire industry
third of a million dollars after 15 years. Clearly, a mortgage can help you create wealth in surprising ways! broadcast each week via ABC Radio.
of “reverse mortgages” has emerged to help similarly
house-rich and cash-poor seniors. Unfortunately, re-
verse mortgages have problems. First, there are limits
26
www.coloradohomeownermag.com www.coloradohomeownermag.com
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