November 7th, 2008 11:12 AM by Lehel Szucs
Hottest Mortgages in the Market Right Nowby David Fessler, Advisory Panelist
Dear Investment U Reader,
Every other week, I make the trip down from Pennsylvania to Investment U's headquarters in Baltimore. While I'm in the area, one of my favorite places to enjoy an evening meal is P.F. Chang's China Bistro (Nasdaq: PFCB) - an outstanding high-end Chinese restaurant.
The only downside is that the wait for a table is typically an hour or more. The reason? The food is excellent, and the service is superb. However, for those of us dining alone, there are plenty of seats at the bar. And these days, there's also plenty to talk about with your "neighbors."
I struck up a conversation with the gentleman sitting next to me, and mentioned I was an investment advisor. He volunteered he was an Equity Loan Officer for Bank of America (NYSE: BAC).
"You have my condolences," I said.
He replied, "I don't need them. Business is booming."
After letting me wonder in amazement for a few moments, he tipped his hand: "Reverse mortgages are the hot new product."
He wasn't kidding. Enter "reverse mortgage" in the search box on your computer's web browser, and Bank of America is the top listing in the search results.
He told me the phones are ringing off the hook, from people who want to sell their home and can't, or those who want to supplement their monthly retirement income stream.
But before you pick up the phone, you should understand what a reverse mortgage is, and more importantly, whether it's right for you.
Reverse Mortgage Basics
A reverse mortgage is essentially a home equity loan that's paid out over time. Banks long ago recognized that some seniors approaching retirement were coming up short on monthly income, and the reverse mortgage was born. It's a way to tap into a home's equity and receive a monthly check instead of making monthly payments.
The loan is paid back when the house is sold due to the owner moving or if the owner dies.
Most reverse mortgages have a minimum age requirement. In the case of Bank of America, it's 62 and older.
The upside to a reverse mortgage is that seniors can remain in their home, keep title to it and can continue to make improvements and basically do anything else one would do prior to getting a reverse mortgage.
Of course, the owner is also still responsible to pay the real estate taxes on the property, as well as homeowners, flood and hazard insurance premiums.
It's also important to note that a reverse mortgage doesn't affect entitlement programs such as Medicare, but Medicaid and other aid programs such as Supplemental Security Income (SSI) might be affected. A reverse mortgage may also affect the homeowner's tax situation.
It's best to consult not only a tax professional, but to also consult Medicare, Social Security and a Medicaid administrator to see what specific rules might affect a particular situation, since each is different.
The question remains, however, is should one even consider a reverse mortgage? While everyone's situation is different, and we of course can't give any individual guidance, there are some important things to consider when deciding if a reverse mortgage is right for you.
Your age is a big factor. People are living longer and longer, and as a result require greater and greater sums to fund their retirement.
Another factor to consider is whether or not you want to stay in your house. Some seniors elect to sell their home and buy or rent a condo somewhere warm. Some give up owning altogether and just rent.
The current housing glut means it's harder to sell these days and sale prices are significantly lower than a few years ago. A reverse mortgage is a way to receive additional monthly income while you wait for the market to recover.
Bottom line, if you can fund your retirement from your investment and bank accounts, don't bother with a reverse mortgage. It is - after all - debt dressed up as equity.
And there's no free lunch: It eventually has to be paid back, either by you or your heirs.
Not owing anybody anything is a great feeling. Your retirement years are supposed to be worry and carefree, and a time to enjoy life.