Reverse Mortgages - The Good, Bad and The Ugly (originally published 5-5-10)

The Department of Housing and Urban Development (HUD) administers FHA insured Home Equity Conversion Mortgages (HECMs), commonly referred to as Reverse Mortgages.  Reverse Mortgages are different from traditional mortgages because they don’t require monthly repayments towards the amount borrowed.  This arrangement provides “cash poor” homeowners with much needed cash.  Sound too good to be true?  Well, maybe yes and maybe, no - let’s look at the good, bad and ugly aspects.

The Good… Homeowners, age 62 and above, who have sufficient equity in their residence may borrow against some of the equity (similar to a Home Equity Loan) and receive cash for the net proceeds of the loan.  There is no requirement to repay the loan while you continue to live on the property.  The proceeds are not considered taxable and do not impact negatively any amounts you would receive for social security or Medicare.  You retain title to the property and if the value of the property were to fall below the outstanding loan amount, the lender cannot foreclose on the property.

The Bad…  The current depressed real estate market has depleted much of the value of residential properties.  The equity once available to the homeowner for securing loans has shrunk.  Most of the banks in our area do not even offer reverse mortgages.  That shouldn’t be a surprise given the recent bank failures due to overextended real estate loans.  Banks want to avoid future risks.  Those institutions that do offer reverse mortgages will charge origination fees, closing fees, appraisal fees and FHA insurance at the closing, reducing further the net proceeds available to the borrower.  Since there are no repayments, the interest on the loan will continue to build and be added to the loan amount.  That interest is also not tax deductible until paid at the end of the loan (when you die, or the house is sold).  

The Ugly… Homeowners who enjoy a long life will most likely outlive the equity in the home -the build-up of interest will eat up all the equity in the property.  That means the bank will get the property when you pass and your heirs get nothing.   If you do go the reverse mortgage route, give your heirs the ugly news when you get the loan.

Avoiding Money Fraud Schemes (originally published 4-21-10)

Less than a year ago, the feds nailed Bernie Madoff for bilking investors for over $50 billion.  Just last week, Joseph Milanowski, former president of the real estate development investment company USA Capital, was sentenced to 12 years in prison and ordered to pay $86.9 million in restitution to over 1,000 victims for wire fraud.  Every day you hear of another victim of identity theft or fraud.  In response to this onslaught of financial pirates, last November, the Financial Fraud Enforcement task force was formed to crack down on some of these big schemers.  According to the FBI, seniors are key targets. Why?  The FBI contends we are generally trustful of others and are more susceptible to promises of big returns and get-rich-quick offers.   Let’s prove them wrong.  Here are some guidelines to follow so you can avoid being a fraud victim:

1.    Know who you are dealing with - callers or email offers may appear as reputable and trustworthy, but do you know them personally?  Have you checked them out with creditable resources? (e.g. Better Business Bureau, your investment advisor, your bank, etc.)

2.    Don’t provide personal information over the phone or in reply to emails. (e.g. your Social Security number, passwords, account numbers, etc.)

3.    Don’t be fooled by “alerts” or “notices” that your account will be closed if you don’t respond.  You can always call back / email using the phone numbers / email addresses from your last statement to ensure they are who they say they are.  Don’t use the phone numbers or email addresses they provide in the “alert” / “notice”.

4.    Never sign “blank” forms or checks when ordering products or services.

5.    As a rule, if it sounds too good to be true - it probably is.

6.    If you become a victim of fraud, notify the FTC’s Bureau of Consumer Protection at www.ftccomplaintassistant.gov.

Tax Planning Tips (originally published 4-7-10)

Welcome to The Frugal Forum – a column for boomers interested in optimizing their return on limited resources.  This column is an open forum for those wanting to contribute their money saving ideas and the rest of us who want to hear from them.  

April 15 is fast approaching and the message in this first issue will focus on keeping what is yours and not theIRS.  Many boomers may still be planning to itemize deductions on their federal return when they may be able to get more of a deduction using the “standard deduction”.  Did you know that the standard deduction for a married couple filing jointly in 2009 has risen to $11,400?   OK, but, did you know about form 1040, Schedule L?  This new schedule allows you to increase your standard deduction for property taxes and sales taxes on the purchase of new motor vehicles.  (No, this has nothing to do with “clunkers”.)  Married couples filing jointly may deduct an additional $1,000 for property taxes paid in 2009.  They may also be able to add to the standard deduction the amount of sales taxes paid on the first $49,500 for the purchase of a new vehicle (that includes motorcycles and motor homes).  If you were crazy enough to purchase your new vehicle in Chicago and pay the 10.25% sales tax, you could have up to $5,074 in additional deductions.   If you have been keeping track here – married joint filers with a new vehicle in 2009 could have an enhanced standard deduction of up to $17,474. It’s not too late.  Check with your tax advisor and keep what is yours.  A penny not paid, is a penny saved.