When a reverse mortgage may serve retirees better than a second home loan
Q: I am a 65-year-old widow, retired, and living on Social Security and a small monthly pension. About a month ago, I took out a $30,000 second mortgage to pay for medical expenses not covered by Medicare and to do some major repairs on my car. So now I have two monthly bank payments totaling $560. My total monthly income is $1,683. Of the loan amount, I have $20,000 left. I'd like to somehow make this amount work for me. If I don't do something with the money, I'll end up spending it and have nothing to show for it. Any suggestions?
M.C., Soldotna, Alaska
A: Well, you could give the $20,000 back to the bank and get out from underneath that debt. With interest rates at their lowest level in decades, your earnings on a CD or any other type of fixed-interest investment might not even match what you're being charged on your loan.
Talk to the bank, or some other lender, about the advisability of a reverse mortgage (RM), suggests Victor Szucs, a certified financial planner in Dallas. An RM is a type of home-equity loan that would allow you to convert the equity in your home into cash while retaining your ownership.
RMs works much like traditional mortgages, only - as their name implies - in reverse. Rather than you making a payment to the lender each month, the lender pays you. Mr. Szucs says that most RMs don't require any repayment of principal, interest, or servicing fees for as long as you live in your home. Funds obtained from an RM may be used for any purpose, including meeting housing expenses such as taxes, insurance, fuel, and maintenance costs.
The RM funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination of the three, depending on the type of RM and the lender. The amount you are eligible to borrow generally is based on your age, the equity in the home, and the interest rate the lender is charging.
Depending on the plan you select, your RM becomes payable with interest either when you permanently move, sell the home, die, or reach the end of the preselected loan term. The lender would not take title to your home when you die, but if your heirs wish to keep it, they must pay off the loan.
Because your home may be your most valuable asset, Szucs advises consulting with your family, an attorney, or a financial adviser before applying for a RM. For more information, log on to the AARP's website at www.aarp.org/revmort.
Q: I am in prison and received an inheritance. Because of my incarceration, I am unable to find a bank in which to place those funds. Currently my funds are in my inmate's account and do not accrue interest. Banks require that you be present and have an ID card before you can open an account. But is there a bank that could open an account through the mail and with power of attorney?
B.J.C.,Tennessee Colony, Texas
A: Try an Internet bank, suggests John Hall, of the American Bankers Association. These banks are used to dealing with people who do business from afar. That would include inmates, such as yourself, or someone in a nursing home or otherwise unable to present themselves directly to the bank to let it identify its client.
New portions of the USA Patriot Act took effect Oct. 1 and boost the responsibility of banks and financial institutions to make complete and accurate identification of clients. So anyone dealing with them will have to be able to produce identification. But it's not impossible.
Many of these Internet or virtual banks also offer dial-in services. So if you don't have access to a computer, or are unable to use one, you can always telephone them and ask for instructions.