Pulling Back The Curtain On Reverse Mortgages

Last week's article on reverse mortgages generated a very interesting response from one reader. Unfortunately, due to his choice of vocabulary, I can't print his response here. Suffice it to say that this advisor doesn't want me saying anything negative about his chief source of revenue. This week I'd like to pull back the curtain on the real reason reverse mortgages have become so heavily marketed and what you need to do as a consumer to protect yourself.

In my previous article, I mentioned an elderly couple from Florida who were considering a reverse mortgage as the answer to their financial crisis. Over the course of a year, they attended two different seminars presented by their bank. This couple was living beyond their means and saw tapping their home equity as a way to keep making credit card payments. A reverse mortgage would have given them access to a $38,000 line of credit, but would have cost them almost half that much in fees.

Fortunately, they shared their plans with their son. They were scheduled to sign the papers in a week. That's when he called me. He gave them my advice and took the time to help them look at all the options available. More on their decision later; the issue I really want to explore is why are conservative banking institutions and mortgage brokers pushing these mortgages so heavily?

The answer is simple and obvious: the collapse of the housing bubble. Home values are declining, credit is drying up, and fewer homes are being bought or sold. Mortgage departments are a huge source of revenue for a bank. Over the last 5 years, the mortgage department has been generating huge profits. Suddenly, that has all changed.

Enter the reverse mortgage. These have been available for some time, but when a loan officer was so busy writing traditional mortgages, there wasn't a reason to focus on them. With some spare time on their hands, mortgage brokers need to find a way to feed their families. And from their point of view, the reverse mortgage is the perfect product for a variety of reasons.

For one thing, reverse mortgages are government guaranteed so the bank doesn't have to worry about losing money in a foreclosure. This is especially important when home values have plummeted 10% or more. In other words, there is very little risk for the bank.

It also helps that the fees on reverse mortgages are amazingly high. That means that the mortgage brokers, if they are successful pushing reverse mortgages, can continue to make money. The bank likes it because the mortgage department continues to add to the bottom line.

A third reason why reverse mortgages are so popular is because the market for them is far larger than the traditional mortgage market. Most people only buy/sell a home every 5-10 years. Think of how many seniors are sitting in homes with huge amounts of equity! Instead of chasing a limited market of home buyers who can afford large down payments, mortgage brokers can tap a larger, ever expanding senior market.

It isn't that banks and brokers shouldn't make money. They should. My primary concern isn't the bank, though. It is you. I want you to understand the motivations of those involved. You should research any large financial decision you make. Get all the facts so you can make an informed decision. It's the same when considering a reverse mortgage.

There are certain situations when a reverse mortgage can make sense, but I expect that there are many, many reverse mortgages done in situations where there were better alternatives. It was never intended as an easy way to pay for dream vacations.

What about my friend's elderly parents? Given all the facts, they chose credit counseling instead. They consolidated their credit card debt while reducing their interest rates. They also decided to sell their home and use their equity to relocate closer to family. Besides leaving a hurricane zone, they'll be moving to a more temperate climate with a much lower cost of living.

Don't blindly fall for the reverse mortgage sales pitch. Explore all the options and make sure youâre making the choice that is best for you. I also suggest you get your children involved as well. You could just sell the house and move in with them (just kidding)!

Nationally-syndicated financial columnist and Certified Financial Planner(R) Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Should Seniors Use Reverse Mortgages?

Some of the most popular products being pitched to seniors today are reverse mortgages. Everywhere you turn there are free seminars, free reports and free DVDs, all touting the amazing benefits these loans offer. Are reverse mortgages the answer to seniors‚ prayers, or are they too good to be true?

It all sounds so wonderful: easy access to your home's equity, no monthly payments, and all without having to sell your house or move. You can have a guaranteed income for the rest of your life! I feel that the sales pitches for these products do a disservice to seniors and, in some cases, can do irreparable damage.

All of us are familiar with a traditional mortgage. You borrow money from the bank using the home for collateral. You are then charged interest on that loan and have to make monthly payments. The larger your mortgage is compared to the value of your home, the less equity (or wealth) has been accumulated.

A reverse mortgage is just like it sounds. You are still borrowing money from the bank and using your home as collateral. The only difference is that you don't have to make monthly payments on what you borrowed. Instead, the interest just builds up. So every month you go further and further into debt and have less wealth.

You don't have to pay off the loan unless you sell the home or no longer live there. Another advantage of a reverse mortgage is that you don't have to have any income to qualify and there are no restrictions on how you use your proceeds.

While these mortgages can be helpful to seniors truly struggling to cover the basics, many seniors see reverse mortgages as free money‚ that can allow them boost their standard of living. Some providers are promoting reverse mortgages as an easy way to pay for that dream vacation or expensive new car. For those with considerable home equity, such possibilities are indeed tempting.

A reverse mortgage is probably the most expensive loan available today. The up-front fees can be astronomical. Here's a real life example. A friend of mine asked me to check out a reverse mortgage being pitched to his elderly parents. The proposal given to them by the bank showed that in order to access $33,000 in equity, they would be charged almost $18,000 in fees! That's over 50%.

His parents had a home worth $230,000 and a $100,000 mortgage. They needed $33,000 and didn't qualify for any other loan. A reverse mortgage has to be the primary loan on the home so enough had to be borrowed to pay off the existing mortgage. So they were paying fees on a loan of $133,000 instead of just the $33,000 they needed.

The lender has to know that they will be able to sell the house for more than you owe on it. That's why they will only lend around 65% of the home's value depending on your age. In some situations, if the home value doesn't appreciate significantly over the years, you could see your equity dwindle away to nothing. You have the miracle of compounded interest working against you month after month.

His parents weren't concerned about the fees because they didn't see it as costing them anything. But it does. That money took decades of making monthly payments to accumulate. It looks just like some numbers on paper, but it can have a very real impact on their future.

The money spent in fees is money that they won't be able to spend on food, medicine or personal care. It's money they won‚t be able to use to fix the roof or get a new water heater. And if they don't maintain the home, the lender can step in and take it away.

For those who receive a set monthly payment from their reverse mortgage, it's true that they won't run out‚ of money. That doesn‚t mean there isn't any risk. The monthly payment doesn't increase from year to year, but the price of everything else does. What will you do if that set payment is no longer enough to meet your expenses, and you've lost much of your home's equity to high fees and interest costs?

A reverse mortgage may be right in special situations, but it's anything but free money.

Nationally-syndicated financial columnist and Certified Financial Planner(R) Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Read more at www.guardingyourwealth.com or visit the website and ask Jeff a question.

Charting a Course for Emerging Markets

Investors dissatisfied with domestic returns have been seeking greater growth in foreign markets. As noted in last week’s article, the growth of emerging markets is not a short-term fad, but a long-term trend that will affect global markets for years to come. The question then, is how you can take advantage of this opportunity without losing your shirt. Read on to find out.

The returns of foreign emerging markets are truly impressive—-20%-100% a year or more isn’t uncommon. Who wouldn’t want to earn 83% in one year like the China index FXI did? Or the 58% it did in 2007! These dramatic returns have caused some investors to throw caution to the wind. They’ve moved significant portions of their portfolios to these markets only to suffer devastating losses.

That’s not what I want for my clients, nor do I want it to happen to you. While the returns are much higher, the risk is also much greater. Unless you have carefully planned how to control that risk then you should leave these markets to the professionals.

Here’s the real question. Are you willing to endure losses of 20-50% that can last for months in order to achieve those stellar returns? Most are not. They jump into these markets only to get discouraged and sell after a big decline. The China index (FXI) is down over 30% since its peak in October of 2007. Would you still be hanging on to it?

Daily swings of 5% to 8% are not uncommon for large-cap Chinese stocks. Newer markets, like those in Vietnam, can take huge dives very quickly. Governments, along with their financial regulations, can change overnight. Growing pains are common for developing markets and those with the stomach to handle the wild ride can be richly rewarded. Clearly, investors have to match their foreign exposure to their appetite for risk.

Investing in emerging markets is not for the faint of heart. That doesn’t mean that you shouldn’t do it. Start small by only investing a couple of percent of your overall portfolio. Then you need to decide the method of investing that is best for you.

There are several ways you can invest in foreign and emerging markets. You can buy individual stocks on the foreign exchange. You can buy foreign companies that are listed on U.S. exchanges. There are exchange-traded funds (ETFs) for just about every country and/or region. There are mutual funds. You can buy bonds as well as stocks.

I only recommend buying stocks on a foreign exchange for advanced, sophisticated investors. This isn’t as hard as it used to be thanks to online brokerage firms, but is still pretty involved. First, the markets like the Hong Kong exchange are located half-way around the world. That means their market is open while it’s nighttime here. Second, you have to convert your money to the local currency prior to making a purchase.

It’s much easier to buy large foreign companies that trade on U.S. exchanges. Doing so isn’t any different than buying any other U.S. stock. Some of these companies trade on the pink sheets. If you go this route, beware of the daily trading volume and the spread (the difference between the bid and ask price).

Good quality mutual funds are perhaps the most popular way to invest outside the United States. There are too many choices to list here and doing your research before you invest is crucial. Some have active management, while others are more passive. Some focus on specific markets while others are more general in nature. Fees can vary widely as well.

No matter how you invest, one major risk to consider is currency risk. When the U.S. dollar is falling, foreign returns benefit. When the dollar is rising, however, foreign returns suffer. This means your return can either be wiped out or greatly boosted, depending on what the currency markets are doing.

While the superlative performance of emerging markets is long term trend, many tactical decisions will need to be made along the way. There are simply too many changes in the governments, rules and regulations and the economies themselves to just set it and forget it. Professional management can add significant value and help you take full advantage of the opportunities that are available.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Read more at www.guardingyourwealth.com or stop by the website to ask Jeff a financial question.

Can Emerging Market Growth Continue?

We've all heard about the amazing growth taking place in developing countries and how the global economy will never be the same again. But countries like China, India and Vietnam seem so far away. It can be hard to understand how those marketplaces can affect the individual investor here in the U.S.A. After my recent trip to Cambodia, I'm here to tell you that emerging markets aren't some short-lived fad. We've only begun to see the impact they will have in the financial markets.

My wife and I had visited Cambodia last March, but this time was different. Besides having our four children along for the experience, the signs of a growing economy were everywhere. Construction was taking place all around Phnom Penh, the nation's capital. A new 42 story office building had broken ground, the country's first skyscraper. It's being financed by a South Korean company. A huge new complex of shops and office buildings were coming up on old rice fields north of town in a special economic zone.

Masses of new apartment buildings were being constructed. The prices of these condo/apartments continue to increase. Those that were $40,000 when construction started are now $100,000. Land values continue to soar exponentially. More people can afford cars. Everyone has a cell phone. Universities and schools teaching everything from nursing to English classes to management and computer skills are popping up on every corner. And the schools are packed.

The city continues to improve its infrastructure with the paving of roads and improvement of their drainage system, which is important during the monsoon season. Internet access is growing as is the availability of cable television. But there's much work to be done. Power outages occur almost daily. The municipal water isn't potable. The sewer system has a very limited reach. There is no mass public transportation service in a city of well over 1 million. There's little garbage collection.

Just outside of town, the picture is even starker. When you travel out to the provinces, it's like stepping back in time. Once you get off the main highway, there are no paved roads. Many homes are simple wooden shacks with thatch roofs. Naked children play with sticks in the road next to ditches that are little more than open sewers. Electricity comes from generators that operate a few hours a day. Health care is almost non-existent. The rice grown in the fields hardly supplies enough grain for each family's yearly needs.

Not all provincial families live in dire poverty. But the majority do. The young people don't want the same life their parents have. They want more. And they're willing to work for it. Many of them turn to the garment factories, where by working six to seven days a week, ten to twelve hours a day, they can make $100 a month. In country where unemployment can reach 50%, that's a nice sum of money. But it's not much of a life.

Others realize that education is their ticket to a better future. The church we visited and were working with offers free English and computer classes. Over 200 students jam every available room of the building four nights a week. In addition, all of these kids attend either high school or university during the day. Many of them came from the provinces and plan to send money they earn back home to help support their families.

So if you think the emerging markets‚ is just the latest financial talk point, think again. The story in Cambodia is the same story all over Asia. These people want a better life. They want a higher standard of living. They are becoming educated. Their countries are only beginning to improve their infrastructure. Astute companies from around the world are investing big bucks into these economies. And the growth is only going to increase.

This isn't a five year fad. It will take decades for these countries to grow into modern nations. But there's no going back. The young people we met are determined and focused. This generation will do what it takes to succeed.

Your generation worked very hard to achieve financial security. In today's changing global marketplace, you'll have to invest smarter in order to maintain it. In next week's article, I'll give you practical steps to take advantage of the opportunities these emerging markets provide.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.