Reverse Mortgages – No Longer a Loan of Last Resort

MONEY TALKS – When most of us hear the term “reverse mortgage” there is usually a negative connotation associated with the phrase. It’s hard to pinpoint why these two words leave such a sour taste in our mouths when you consider that most of us don’t even know anyone with a reverse mortgage. Furthermore, when pressed on the issue of why reverse mortgages are bad, the standard response is usually; “Ummm, I don’t know. I just heard they were bad because they take advantage of senior citizens.” Perhaps you are subconsciously hearing Henry Winkler’s smooth cadence from the reverse mortgage TV commercial while thinking of a poor widow from Nebraska who just lost her family home. The truth of the matter is, due to some recent legislative changes to protect the consumer, a reverse mortgage is no longer a loan of last resort. If fact, in the right circumstance, it can be used as a very effective financial planning tool to preserve your wealth.

What is a Reverse Mortgage? – A reverse mortgage is home loan that allows you to own your home without having to make monthly mortgage payments. Instead of making monthly payments, like you would with a traditional mortgage, the loan balance on a reverse mortgage is paid in one lump sum when the borrower moves out, sells the home, or passes away. One popular myth circulating among the public is that the bank can kick you out of your home if the mortgage balance exceeds the value of the home. This is simply not true. As long you live in the home, keep it insured, pay taxes, and maintain the property, the bank can never force you to move out or sell the home. Another common misconception is that your family could get stuck with a big mortgage debt. When the borrower passes away, your family has two options. They can either purchase the home, for 95% of the appraised value or the mortgage balance (whichever is lower), or sell the home. If they choose to sell the home and the home value exceeds the mortgage balance, they can keep any remaining equity. Conversely, if the mortgage debt exceeds the value of the home they can walk away without owing a nickel. Since the loan is guaranteed by the Federal Housing Authority (FHA) Mortgage Insurance Fund your family can never be liable for any amount over the value of the home.

Why Should You Consider a Reverse Mortgage? – The use of home equity in a retirement-income plan is becoming a more popular tool used by financial advisors today because of the flexibility and protection it affords their clients. For many Americans, their home is their largest asset, yet under a traditional model the accessibility to this asset is nonexistent. Integrating a reverse mortgage into a financial plan may allow clients to tap into their biggest asset that otherwise has been hiding under their nose. In fact, Wade Pfau, Professor of Retirement Income at the American College of Financial Services, states; “the reverse-mortgage option should be viewed as a method for responsible retirees to create liquidity from an otherwise illiquid asset, which in turn can create new options that potentially support a more efficient retirement income strategy.” Integrating a reverse mortgage into a retirement plan can be a great option for seniors who want accessibility to the equity in their home and the comfort of knowing they can age in place.

Are You Eligible? – In order to be eligible for a reverse mortgage the borrower(s) must be competent, at least 62 years of age, and have equity in the home. They must have the financial resources to cover taxes, insurance, and maintenance costs. Federal debt cannot exist and any existing mortgages on the property must be paid off (which can be done with the loan proceeds). Lastly, a receipt of a counseling certificate from an FHA approved counselor must be provided. In order for the property to be eligible it must serve as your primary residence, meet FHA property standards and flood requirements, pass an FHA appraisal, and be maintained to meet FHA health and safety standards.

What Now? – Thanks to the Reverse Mortgage Stabilization Act of 2013, many safeguards were put in place to protect borrowers from taking on too much debt. However, as with any other loan, there are risks involved. “Unquestionably there can be misuses of the product. But the problem is the use, not the product” says Harold Evensky, Professor of Personal Financial Planning at Texas Tech University. Understanding the complexities of the loan and how to best integrate it into your financial plan are critical to success. Speaking with a CERTIFIED FINANCIAL PLANNER™ and/or FHA approved counselor would be a good start to finding out if you could benefit from a reverse mortgage.

5 Mother’s Day Gifts That Keep On Giving

MONEY TALKS –

With Mother’s Day on the horizon, you may be scrambling around to find the perfect gift for mom. While none of the gifts below can be tucked in a card or fit into a box, they all will touch mom’s heart in one way or another. Following these simple steps will make mom proud and keep her happy for years to come.

1. Start Saving Early – Most of us have probably heard mom repeat the old adage that a penny saved is a penny earned. While saving pennies today won’t get you far (a Venti Latte at Starbucks will cost you four hundred and fifteen), saving dollar bills will. If you saved a dollar per day from the time you were 10 years old until you reach 16.5 years old, you could have almost $3,100*. While this won’t buy you a new BMW, it could go a long way towards purchasing that used Toyota Camry your neighbor is selling.

2. Finish Your Degree – On average, college graduates earn about a million dollars more over their lifetimes than high school graduates. In fact, the average salary for a 2016 college graduate has soared to over $50,000, while high school graduates are treading around $35,000. Higher earnings typically allow us to become financial independent earlier in life. Becoming independent will ease mom’s financial burden and allow her to focus on own needs such as a trip to the salon or a relaxing massage.

3. Pay Your Student Loans – If mom was nice enough to co-sign on your student loans, missing a payment or making a late payment could adversely affect her credit. This could prevent mom from qualifying for a home equity line to update the kitchen or from purchasing that condominium in Florida she’s been dreaming about for the last few years. Set up the auto pay function on your student loans to ensure your payments are always made in full and on time.

4. Do What You Love – Above all, mom wants to see you happy. Choosing a career in a field that interests and excites you will inherently lead to a happier and more rewarding life. Focusing your time and efforts on something you are truly good at will allow you to fully realize your unique abilities and add more value to the world.

5. Pay It Forward – As a young child it’s incomprehensible to understand how giving can be more rewarding that receiving. However; as we age and mature, the gratification from helping someone else far outweighs the rewards of receiving a tangible gift. Make mom proud by choosing a cause that you are passionate about and start giving back. There are lots of ways you can give back whether it be a simple monetary donation, giving physical goods, volunteering your time, sharing special skills, or by recruiting others to help.

I would be remiss if I didn’t mention that all mom’s love flowers. Stop by your local florist and pick up a flower bouquet or mixed floral arrangement. And don’t forget the card! Here’s to wishing all the moms out there a joyous mother’s day.

 

*Using an 8% interest rate, compounded monthly.

5 Ways to Turbo Boost Your Savings in 2017

MONEY TALKS – Achieving your goals and aspirations may be closer than you think. Saving is the foundation to any good financial plan. Follow these five steps to boost your savings to the next level!

  1. Max Out Your Retirement Plans – In 2017 you can defer up to $18,000 of your salary into an employer sponsored retirement plan such as a 401(k), 403(b), or 457 plan. If you are age 50 or older, the IRS has a special “catch-up” provision which allows you to contribute an additional $6,000 for a total contribution limit of $24,000. If your employer doesn’t offer a retirement plan you may still be eligible to contribute to a Traditional or Roth IRA. The IRA contributions limits for 2017 are $5,500 or $6,500 for those age 50 or older. If you didn’t maximize your IRA last year there is still time. The Internal Revenue Code has a special provision permitting you to make a 2016 contribution up until April 17th of 2017.
  1. Know How Much You Are Spending – Most people have no idea what they are actually spending. While some bold participants may blurt out a response when asked, in my experience what people say they are spending and what they are actually spending are two very different numbers. A good back of the envelop approach to calculate your spending is to look at your final pay check for 2016. Take your year to date gross pay and subtract any taxes paid as well as any employee benefits such as medical, dental, and retirement contributions. This in effect is your take home pay. From there subtract any additions you made to long term savings accounts throughout the year and you have calculated your annual spending. Most people are surprised by how much they are spending. Now that you know how much you’re spending, keep any eye on major outflows and set up an automatic transfer to your savings account to ensure some money is put away before hitting your pocket.
  1. Review Your Investment Portfolio – When it comes to determining an appropriate asset allocation, most people take the set it and forget it approach. Meaning they randomly picked some stock and/or bond mutual funds when they enrolled in their employer retirement plan, and they have not looked at it since. For many of us this could be 5, 10, or even 20+ years. Review your most recent portfolio statement to see if your current allocation is still appropriate for your age. Traditionally younger investors can be more aggressive and allocate a higher percentage of their portfolio towards equities. On the other hand, seasoned investors whom are approaching retirement may want to reduce their risk by diversifying into more bond funds and less stocks. If your current asset allocation is appropriate for your age, be sure to rebalance your accounts annually to make sure your portfolio stays properly aligned.
  1. Take Responsibility – The glamorization and/or demonization of politics and economics by the media can be hard to ignore because they are on the face of every TV station, newspaper, and social media site. Nonetheless, it’s essential to remember that for the most part these situations are out of your control. However, that doesn’t mean you should sit idly by and hope for the best. To use a weather analogy, while you don’t have control over when the next snow storm will hit, you do have the ability to buy snow tires for your car, a new shovel, and salt for your driveway. By personally managing the internal factors in your life such as; how much you save, your consumer loan balance, and the size of the home you purchase, you are taking responsibility over the aspects in your life that allow you to control your own financial destiny rather than taking a back seat to external factors over which you are powerless.
  1. Invest in Yourself – Many people don’t realize that the greatest financial asset they have is themselves; i.e. their ability to earn a living. Investing in post-secondary education, technical training programs, and advanced degrees go a long way toward building a complete resume. Combine these skills with quality work experience and you have just positioned yourself for a financially rewarding career.    

5 New Year’s Resolutions for 2017

MONEY TALKS – Lakeside Financial Planning was fortunate enough to be featured in a recent article on Investopedia’s advisor insights platform. The article is published below or you can view the original source by clicking here.

1. Pay off Consumer Debt
Credit cards can have interest rates well into the double digits. Paying off credit card debt is a great way to free up cash flow for the future. Credit card purchases are generally for short term items that have no lasting value. Putting away your credit cards and learning to live within your means can go a long way towards financial independence. If you are prone to consumer debt, try consolidating your credits cards down to one and using cash for everyday purchases.

2. Build an Emergency Reserve
Wage earners should have a minimum of 10% of their gross annual income in a long term savings account. An additional 20% should be saved as an emergency reserve. The best place for your emergency reserve is within your 401(k) or other tax sheltered accounts because the interest earned is tax deferred. Self-employed and retired individuals should build their cash/emergency reserves to an even greater level. As an additional test, the combined value of cash and emergency reserves should be at least 20% of your mortgage balance.

A Home Equity Line of Credit or HELOC is loan where a homeowner can borrow against the equity they have in their home. Unlike a conventional home equity loan where the borrower is advanced the entire lump sum up front, a HELOC is different in that the borrower only draws on the line of credit if needed. A HELOC could be used to cover a variety of expenses including unforeseen outlays for home improvements or medical bills. Homeowners should consider getting a HELOC as a supplement to their cash/emergency reserves as an added security blanket.

3. Purchase Long Term Disability Insurance
For most workers, the ability to earn a living is their most significant financial resource. A disabling illness or injury stops income, often leads to additional medical costs, and prevents savings for key goals such as education and retirement. Despite these facts, employees are more likely to have dental insurance than long term disability. The reason for this is most people associate disability with serious accidents. Since very few employees have high risk jobs, the general inclination in the workforce is to say, “I don’t need it” when it comes to disability insurance. In reality this couldn’t be further from the truth as 90% of disability claims are due to illness not injury. Even people who don’t have high risk jobs are still at risk of disability from cancer, cardiovascular, muscular, or other illnesses. A disabling illness or injury can have a devastating effect on you and your family. Purchase long term disability insurance now to protect you and your family’s financial security.

4. Increase Retirement Savings
Most company retirement plans allow you to enroll in a plan where your contributions are automatically deducted from your paycheck and directly deposited into the retirement plan. The beauty of automatic deductions is, since you never see the money, it’s nearly impossible for you to spend it. The only problem with this out-of-sight, out-of-mind enrollment process is most people set up a standard contribution rate when they enroll in their plan and never think to increase it. Lots of employers now offer an auto increase plan where your contribution percentage will increase by 1% per year. If your employer offers an auto increase plan be sure to enroll, if not then be sure to increase your contribution percentage manually each year. Consider investing in an Individual Retirement Account (IRA) if your employer does not offer a retirement plan.

5. Create an Estate Plan
Approximately 55 percent of American adults do not have a will or other estate plan in place. The primary reason for this staggering statistic is twofold; one being that no one wants to think about their own demise. The other; more alarming reason, is because many Americans are ill-informed on benefits of an estate plan. The most common excuses I hear are; “I don’t have children so I don’t need an estate plan” and “estate plans are only for wealthy families.” Both of these statements couldn’t be further from the truth. Most people don’t know that one of the primary purposes of an estate plan is to give guidance while you are still living. Questions such as, whom do you want to make medical decisions on your behalf or what are your wishes concerning life-prolonging procedures are typically addressed in a comprehensive estate plan. Regardless of your wealth or family situation an estate plan is beneficial for everyone involved.